Banks Under Scrutiny Of SEC for Trying To Dress Up Bad Loans

The Securities and Exchange Commission (SEC) has announced that it is focusing on U.S. banks that have restructured troubled loans to make them appear to be healthier than they really are. The focus is on an unknown number of regional and community banks with large concentrations of commercial real estate loans.

Since many banks are still weighed down by bad loans, some banks have been restructuring the loans to give the borrower more time to repay the loan in a practice known as “extend and pretend” or “amend and pretend.” These troubled debt restructurings involve modifying the terms and conditions of the original loan or breaking the loan into pieces. If the loan is broken into pieces, the bank will sometimes place a portion of it in “performing” status reducing the amount of reserves that need to be set aside.

One bank, Fifth Third Bancorp, a regional bank in Cincinnati, said it had been subpoenaed by the SEC but declined to comment other than to sate that its loan accounting had been appropriate. In 2010, the restructuring of bad loan debt was a big issue for ShoreBank Corporation forcing its collapse. Reportedly U.S. banks have an estimated $156 billion in soured commercial real estate loans, with two thirds maturing from now to 2015 being underwater or worth less than what is owed.

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