Amend and pretend loans are failing loans that are likely still headed for default, despite the liberalization of terms by the lender, such as extended payment periods, reduced payments and/or a lower interest rates.
Interestingly, despite the political pressure being placed on banks to relax terms for troubled borrowers, The Federal Reserve is taking action against amend and pretend loans, insisting upon approval from banks' boards of directors for loan restructurings. In particular, The Fed has specific concerns about the restructuring of loans to bank insiders, especially among banks that have received bailout funding.
In general, The Fed worries that the amend and pretend process is merely a way to hide pending losses and postpone their recognition. Thus, holding a large volume of amend and pretend loans will make a bank look more solvent that it really is, and perhaps lead to a greater potential liquidity crisis in the future.
