By ROBIN SIDEL And JEAN EAGLESHAMThe Securities and Exchange Commission is scrutinizing U.S. banks that have restructured troubled loans in order to make them appear healthier than they really are, according to people familiar with the situation.
Officials at the SEC are seeking information from an unknown number of regional and community banks with large concentrations of commercial real-estate loans, these people said.
The agency is zeroing in on a variety of practices used by financial institutions as they work to clean up loan portfolios that were bruised by the financial crisis or recession. While the U.S. banking industry is in recovery mode, many banks still are weighed down by soured loans.
Among the practices being examined by the SEC is one known as "extend and pretend" or "amend and pretend," in which a bank gives a borrower more time to repay a loan. Banks are permitted to modify loans to help troubled borrowers.
The SEC also is looking into a more common practice called "troubled debt restructurings." Such restructurings involve modifying an existing loan by changing the terms or breaking the loan into pieces.
The scrutiny comes as banking regulators in the past year have supported the use of troubled debt restructurings, which may have opened the door to abuses.
Although the practice is permitted, SEC officials are concerned about the way some banks are accounting for such loans, according to people familiar with the probes.
Banks sometimes break up a troubled loan in order to place a portion of it on "performing" status, a sleight of hand that reduces the reserves needed to be set aside.
It isn't clear which banks have been approached by the SEC for more information about extend-and-pretend loans or restructurings of troubled loans, though several financial institutions have disclosed recently that they are the subject of SEC inquiries related to commercial loans prior to 2010.
Fifth Third Bancorp, a regional bank based in Cincinnati that said Monday it has been subpoenaed by the SEC, declined to comment Wednesday when asked if the inquiry is related to extend-and-pretend practices or troubled loan restructurings.
Fifth Third Chief Financial Officer Daniel Poston said Tuesday that the SEC hasn't told the bank about the specific purpose of the inquiry.
Fifth Third's "loan accounting is and has been appropriate," he said.
Restructurings of troubled debt played a part in last year's collapse of ShoreBank Corp., a Chicago lender.
A report released Wednesday by the Federal Deposit Insurance Corp.'s Office of the Inspector General concluded that ShoreBank failed to "accurately identify and account for" troubled debt restructurings.
The report said ShoreBank restructured "numerous" loans without accounting for them properly "despite rate and/or other concessions provided to financially distressed borrowers."
U.S. banks hold an estimated $156 billion of souring commercial real-estate loans, according to research firm Trepp LLC. About two-thirds of commercial real-estate loans maturing at banks from now to 2015 are underwater, meaning the property is worth less than the amount owed.
As of Dec. 31, 7.8% of commercial-property loans held by banks were delinquent, down from 8.6% a year earlier, according to Trepp.
A Federal Reserve survey released Wednesday projects "a slow recovery" in commercial real-estate markets across the U.S.
The Financial Accounting Standards Board, which sets corporate-accounting procedures, is expected to soon finalize criteria that set new rules for how banks should account for troubled loans.