Letter 40: Nonaccrual of Interest

It has come to my attention that some banks have not adopted a nonaccrual policy for those loans which are in default with respect to the payment of principle and interest. The purpose of this letter is to advise banks of the accrual accounting procedures to be applied to loans in the event the borrower fails to make required principal or interest payments.

Banks may not continue to accrue interest on assets if the bank is not receiving required payments of principal or interest according to the anticipated payment schedule. Any loan upon which principal or interest has been in default for a period of 90 days or more is to be placed in a nonaccrual status. At such time as interest and principal payments on the loan are brought current, the loan can be restored to an accrual status.

Once a loan is placed in a nonaccrual status all previously accrued but uncollected interest is to be charged back against the bank's current income and/or loan loss reserve accounts, as appropriate. The application of this procedure will require that bank management assure that charges to the bank's loan loss reserve are sufficient to provide for the reversal of nonaccrued interest in the event loans are placed on a nonaccrual status.

In anticipation of that portion of the Officer's Questionnaire in the Report of Examination dealing with loans on nonaccrual status, bank management should maintain a current listing of these loans. The examination staff has been instructed to request this list at the commencement of each examination. I would appreciate your cooperation in making certain a report of the loans in nonaccrual status is available to the examination staff at that time.

Bkg. Ltr. #40, May 8, 1985, Commissioner Galecki

Nonaccrual of Interest--Letter #40A

On May 8, 1985, the Office of the Commissioner issued Banking Letter 40, regarding nonaccrual of interest. Since the issuance of the letter, this office has received a number of inquiries regarding the policy. The requirements of Banking Letter 40 have been reviewed and it has been determined that there will be no changes forthcoming in the policy as previously stated.

Only those loans fully secured to cover principal and interest by U.S. government securities, securities issued by agencies of the U.S. government, marketable securities, verified cash surrender value, and those loans or portions thereof which are guaranteed as to principal and interest by a government agency are exempt from Banking Letter 40. All other loans should adhere to the nonaccrual policy established in the May 8, 1985, letter.

Our examination staff has been instructed to review each bank's compliance with Banking Letter 40 and to make comments regarding the bank's nonaccrual policy.

Amendment to Bkg. Ltr. #40, December 30, 1985, Commissioner Galecki