Classified Assets And Restructuring: Once A Low-Quality Asset, Now A Harder Path Out

Under Regulation W, a bank generally may not purchase a “low-quality asset” from an affiliate. But what exactly qualifies as a low-quality asset, and can an asset escape that status through restructuring?

A low-quality asset includes, among other things, assets classified by examiners as “‘”substandard,” “doubtful,” or “loss.” The question arises: if a classified asset is restructured, does it lose its low-quality status? The answer is no. The asset remains a low-quality asset until it is re-examined and de-classified by bank examiners.

This is a strict rule. The bank cannot unilaterally determine that restructuring has cured an asset’s low-quality status. Only an independent examination and explicit de-classification by examiners can remove the low-quality label. This prevents banks from engaging in cosmetic restructurings to circumvent the low-quality asset purchase prohibition.

The practical impact is significant for banks contemplating asset purchases from affiliates. Even if an affiliate has restructured a loan and the borrower is now current, the bank cannot purchase that asset from the affiliate unless examiners have affirmatively removed the classified designation.

DM Tip: Before purchasing any asset from an affiliate, obtain the most recent examination classification status. Do not rely on restructuring, cure, or current payment status alone. If the asset was previously classified, confirm in writing with your examiners that it has been formally de-classified before completing the purchase.