fully expects to collect the original contractual
principal and interest. At what point is there
enough evidence of repayment to place this loan
back on accrual status?
The OCC, in its Bank Accounting Advisory Series,
indicates that the borrower should demonstrate
a sustained period of repayment performance. A
bank should use its discretion when evaluating
the term sustained period. An institution needs
to have supportable evidence that this newfound
behavior of repayment is indicative of long-term performance and hasn’t been spurred by a
temporary influx of cash to the borrower.
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Additionally, even though a portion of the loan
has been charged off, there may be cause to
place the credit back on accrual if all principal
and interest amounts contractually due are
reasonably assured of repayment within a
reasonable period of time. Of course, the
particulars of an individual credit situation
will impact the final decision to place it back
on accrual or not. There’s no specific guidance
on the acceptable time period. However, it’s
suggested that six months of payments be
collected before returning the credit to accrual
status. Ultimately, a loan should be returned to
accrual status only if full payment of contractual
interest and principal is expected.
While the topic of classification between
accrual and nonaccrual may present issues,
understanding the appropriate application of
payments is also important. Interest income
on nonaccrual loans shouldn’t be recognized in
most cases—except when applying cash-basis
treatment. When doubt exists about the ultimate
collectibility of principal, wholly or partially, any
payments received should be applied to principal.
Conversely, when doubt no longer exists, interest
payments may be recorded as interest income.