Banks Urged To Offer More Loan Help As Pandemic Drags On

By Jon Hill
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Law360 (August 4, 2020, 7:40 PM EDT) -- Federal and state banking regulators are prodding banks to extend more help to borrowers still struggling with the effects of the COVID-19 crisis, outlining a selection of broad principles for banks to consider as initial loan accommodations wear off while the pandemic wears on.

In a statement issued Monday, the Federal Financial Institutions Examination Council renewed calls from the banking agencies for the industry to offer "prudent" loan modification programs, noting that many borrowers who took advantage of such programs in the spring haven't yet been able to get back on their feet financially but may soon see the temporary relief run out.

"The agencies encourage financial institutions to consider, when appropriate, prudent options for additional accommodations that can ease cash flow pressures on affected borrowers, improve their capacity to service debt, and facilitate the financial institution's prudent management of its loans, consistent with applicable laws and regulations," the FFIEC said.

The Federal Reserve, Consumer Financial Protection Bureau and other federal banking agencies whose chiefs sit on the FFIEC first urged flexibility from lenders in March, as large swaths of the U.S. economy were being shuttered by state and local governments to stem the spread of the novel coronavirus.

The agencies followed up with further reporting and consumer protection guidance for banks' borrower relief programs in April after lawmakers passed the first coronavirus relief package, which included broad mortgage forbearance provisions, negative credit reporting protections and a break from certain accounting rules that would make it tougher for banks to offer pandemic-related loan modifications.  

But with the pandemic still raging months later, many borrowers are nearing the end of their modification periods as they continue to experience significant financial hardship. In such cases, "it may be prudent for the financial institution to consider additional accommodation options to mitigate losses for the borrower and the financial institution," the FFIEC said on Monday.

According to the FFIEC, whose members also include a representative from the state banking agencies, the decision about whether to provide more relief should take into account a loan's specific risk factors affecting its collectability, such as the financial health of the borrower and changes in collateral values.

"The COVID event may have a long-term adverse impact on a borrower's future earnings and therefore management may need to rely more heavily on projected financial information for both commercial and retail borrowers in making underwriting decisions as supporting documentation may be limited, and cash flow projections may be uncertain," the FFIEC said.

Monday's statement also stressed the regulators' desire to see banks help consumer borrowers avoid delinquencies once they've hit the end of their temporary payment relief and listed a number of consumer protection suggestions to that end.

Among other things, the FFIEC said banks would do well to apprise consumers of relief options with "clear, conspicuous and accurate" communications and to start reaching out to borrowers early so there's ample time to plan next steps.

Relief options should further be based on consistent evaluations of consumers' financial situations and "reasonable capacity" to repay, the FFIEC said, though it acknowledged that data limitations, the pressures of the pandemic and the complexities surrounding government assistance programs can make credit risk hard to gauge.

As for recording and reporting any additional borrower help, the interagency body explained that subsequent loan modifications can still be covered by the accounting relief that was provided for banks in March under the  Coronavirus Aid, Relief and Economic Security Act.

Banks may also not need to classify a remodified loan as "troubled" under current accounting rules if the additional modifications are all pandemic-related, short-term in nature and are applied when the borrower isn't more than 30 days past due, according to the statement.

The FFIEC further advised that banks and their servicers conduct internal controls tests to verify, for example, that proper authorization is being given for additional accommodations, that borrowers are seeing their accommodation options presented to them fairly and consistently and that servicing systems tabulate balances, required payments and billing statements accurately once accommodations end.

"Well-designed and consistently applied accommodation options accompanied by prudent risk management practices can minimize losses to the financial institution, while helping its borrowers resume structured, affordable, and sustainable repayment of amounts contractually due over a reasonable period of time," the FFIEC said.

--Editing by Alanna Weissman.

For a reprint of this article, please contact reprints@law360.com.

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