Nonaccrual Loan

A nonaccrual loan is a loan that stops generating interest income for the lender because the borrower has failed to make required payments—typically for 90 days or more. At that point the lender stops recording accrued interest as income and recognizes interest only when cash payments are actually received.

How nonaccrual loans work

• Threshold: Loans are generally placed on nonaccrual status when principal or interest is 90 days past due, in default, or repayment is otherwise unlikely.
• Cash-basis treatment: Interest is recorded on a cash basis (only when received) rather than as accrued income.
• FDIC criteria: An asset is nonaccrual if it is maintained on a cash basis due to borrower deterioration, full repayment is not expected, or principal/interest is 90+ days past due—unless the asset is both well‑secured and in active collection.
• Well‑secured exception: A loan secured by strong collateral (e.g., valuable real estate or guaranteed by a financially responsible third party) may not be placed on nonaccrual if collection is in progress.

Consequences

For lenders:
– Must stop accruing interest income and may increase loan-loss reserves.
– May pursue restructuring, collection efforts, or legal remedies.

For borrowers:
– The loan is reported as substandard to credit agencies, which can damage credit scores and future borrowing ability.
– May face foreclosure or collateral liquidation if the loan is secured and the borrower defaults.

Restoring accrual status

A nonaccrual loan can return to accrual status if the lender has reasonable assurance the borrower will resume repayment. Common paths include:
– Catching up: Borrower pays all overdue amounts and resumes regular payments.
– Performance period: Resuming scheduled principal and interest payments for a sustained period (commonly six months) with reasonable assurance that outstanding amounts will be paid.
– Securing the debt: Borrower provides acceptable collateral and repays the outstanding balance within an agreed short period (often 30–90 days), then resumes monthly payments.

Troubled Debt Restructuring (TDR)

If a borrower is in financial difficulty, the lender may offer a troubled debt restructuring. TDR options can include:
– Reducing principal or interest,
– Lowering the interest rate,
– Allowing interest‑only payments for a time,
– Modifying repayment terms.

TDRs require specific accounting and reporting treatment. Regulators such as the Office of the Comptroller of the Currency (OCC) provide guidance on the requirements lenders must follow when reporting and accounting for TDRs.

Can any loan become nonaccrual?

Most loans can be placed on nonaccrual if payments are sufficiently delinquent. Secured loans are subject to seizure and liquidation of collateral if default occurs, which affects recovery prospects and whether nonaccrual treatment is applied.

Key takeaways

• Nonaccrual status typically begins after 90 days of missed payments or when repayment is unlikely.
• Lenders stop accruing interest and report the loan as nonperforming; interest is recognized only on receipt.
• Borrowers can restore accrual status by catching up on payments, providing collateral, or entering an approved restructuring and demonstrating sustained performance.
• Regulators set specific criteria and reporting rules for nonaccrual loans and troubled debt restructurings.

Bottom line

Nonaccrual loans signal repayment problems and have financial and reporting implications for both lenders and borrowers. Early communication with the lender and exploring restructuring options can improve the chances of returning a loan to accrual status and minimizing long‑term damage to credit and financial standing.