Multi-Agency Guidance on Leveraged Lending Practices

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On March 21, 2013, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “agencies”) issued joint guidance on leveraged lending (the “Guidance”), modifying draft guidance which was initially proposed on March 26, 2012 (the “proposed guidance”). The Guidance supersedes lending standards that were previously issued by the agencies in 2001 (the 2001 Guidance”). The Guidance is substantially similar to that which the agencies initially proposed, but certain points have been changed or clarified with input from comment letters submitted by market participants and industry groups. Failure to adhere to these standards could result in a finding that an institution is conducting lending activities in an unsafe and unsound manner.

The Guidance emphasizes that financial institutions should be able to demonstrate their ability to evaluate and monitor underwritten credits (including unfunded commitments) and understand risks that could result from a variety of external factors. Each institution subject to the Guidance is required to meet the agencies’ “minimum expectations” for robust risk management processes, and must adhere to policies and procedures on several topics discussed below.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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