In the first quarter of 2016, Wells Fargo reported an increase of over 60 percent in commercial and industrial loans that federal regulators deemed criticized loans . This is not the act of harshly rebuking a loan for what it’s used for. Instead, it’s a loan designation defined by the Federal Insurance Deposit Corporation (FDIC) to flag a loan with the potential for not being paid. It is one in a list of loan designations like “doubtful” or “substandard” which alert bank officers and federal officials to potential loss by the obligor. But, what makes a Criticized Loan different than the others.
Also known as a classified loan, this type of lending is categorized as criticized if it’s in danger of default. Some of the situations which deem a loan as criticized include unpaid interest and outstanding principal. There is also a higher percentage of uncertainty if the financial institution can recoup loan proceeds from the borrower. acceptable credit standards according to bank examiners. Another factor of this type of loan is its credit quality. When it is critized it has essentially declined since the initial approval was granted to the obligor.
This type of loan has a high rate of default by the borrower. In turn, it raises the cost of borrowing money for the other customers who apply for loans. And, like Wells Fargo, the more loans that are criticized the more scrutiny from federal regulators. Eventually, when enough borrowers default, the bank can go to court in order to get the money back.
When this happens, law firms turn to consultants and expert witnesses in the financial field. People who do this, like those at M. Richards Consulting, have spent years in the industry or have extensively studied the field to provide expert testimony for the bank on the default and, possibly, why the borrower is able to pay. Conversely, the expert can be hired to work for the defendant against the bank if they feel the financial institution has been unfair.
The best way for the bank for you to avoid such a situation when it comes to a criticized loan is to borrow only what you need and ensure you have the ability to pay it back on time.