On October 3, the OCC issued Bulletin 2024-29, providing guidance on managing credit risk associated with refinancing commercial lending. The bulletin applies to all banks with commercial loans and highlights the increased risk of borrowers being unable to replace existing debt under reasonable terms, particularly in rising interest rate environments and underperforming markets. According to the OCC, refinance risk primarily affects loans with remaining principal balances at maturity and “borrowers who rely on recurring debt for their capital structure or business operations,” with loan types such as “interest-only loans, commercial real estate loans, leveraged loans, and revolving working capital lines.”

The bulletin emphasizes the importance of banks having processes to “identify, measure, monitor, and control refinance risk at both the transaction and portfolio levels.” Effective management practices include “assessing refinance risk at underwriting, during ongoing monitoring, and near maturity.” Banks are encouraged to use multivariable stress testing to evaluate the potential impact of changing borrower financial conditions or market conditions on borrowers’ ability to refinance. Additionally, the bulletin advises banks to structure loans to mitigate refinance risk by setting appropriate underwriting standards and covenants.

At the portfolio level, banks should monitor the volume and timing of upcoming loan maturities and evaluate refinance risk when determining credit risk ratings. The bulletin also suggests banks have “refinance plans in place for borrowers with near-term refinancing needs” and consider refinance risk when developing loan workout strategies.