The Great Recession of 2008 highlighted the lending standards of banks and mortgage companies across the nation. Many of these assets were substandard causing a series of foreclosures and short sales that left areas of the country reeling. While lending standards have tightened, there are still criticized assets on the books.
Criticized assets include classified loans and more. These criticized loans are seen as a potential loss or bringing doubt that the borrower can repay the debt. These assets are seen as risky or substandard. There can be classified as a loss, substandard or doubtful. A non-collectible asset is considered a loss and basically worthless. Substandard loans imply there is potential for the debt to be liquidated. There is either a payment concern or weakness regarding the loan. When the bank feels they will not receive the full amount of the loan in repayment, the loan is doubtful.
To further expand, here are some examples. An open-ended credit card past due 180 cumulative days would be considered a loss. However, if it is only 90 days past due, it would be considered substandard. The bank may decide to sell an asset once it becomes doubtful. A collection agency then tries to collect on the money after paying pennies on the dollar for the loan in question.
Each type of criticized asset has a certain effect both on the borrower and the bank. A bank manager may spend more time with the doubtful or substandard loans to try and get them back into good standing. A borrower with a delayed payment history may be able to negotiate with the bank on terms to bring the value of the loan up for the bank. Once the loan becomes a loss, the bank may no longer think the asset is worth their time.