On August 3, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued a Joint Statement on Additional Loan Accommodations Related to COVID-19 regarding loans that are near the end of an initial loan accommodation period. The FFIEC defines a loan accommodation as “any agreement to defer one or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract or provide other assistance or relief to a borrower who is experiencing a financial challenge”.
The FFIEC encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of COVID-19
As loans approach the end of the accommodation period, the FFIEC recommends the following five principles of prudent practice:
- Prudent Risk Management Practices
This includes identifying, measuring, and monitoring the credit risks of loans that receive accommodations, understanding the provisions of loan agreements and accurately monitoring the terms of the accommodations. Examples are payment changes, interest rate changes, and modified amortization terms.
2. Well-Structured and Sustainable Accommodations
Additional accommodation options might be prudent if a Borrower continues to experience financial difficulties after the initial accommodation. Moreover, additional accommodations may help mitigate further losses for the financial institution and assist the borrower in resuming a sustainable repayment track over time.
3. Consumer Protection
The FFIEC states that risk management effective approaches include:
- Providing additional accommodation options to borrowers that are affordable and sustainable.
- Providing clear, conspicuous, and accurate communications and disclosures to inform the borrowers of the available options.
- Providing such communications and disclosures in a timely manner.
- Basing eligibility and payment terms on consistent analyses of borrowers’ financial condition and reasonable capacity to repay.
- Ensuring policies and procedures reflect accommodation options offered by the financial institution and promote consistency with applicable laws and regulations, including fair lending laws.
- Providing appropriate training to employees and other persons responsible for compliance and operational procedures related to any additional accommodation options, including customer service personnel. Ensuring that risk monitoring, audit, and consumer complaint systems are adequate to evaluate compliance with applicable laws, regulations, policies, and procedures.
- Providing complete and accurate information to borrowers and subsequent servicers during loan transfers and ensuring post-transfer servicing is consistent with the agreement with the borrower and the borrower’s status at the time of transfer.
4. Accounting and Regulatory Reporting
Financial institutions must follow applicable accounting and regulatory reporting requirements for all loan modifications, as the term “modification” is used in U.S. Generally Accepted Accounting Principles (GAAP) and regulatory reporting instructions. This includes additional modifications made to borrowers who may continue to experience financial hardship at the end of the initial accommodation period. This involves maintenance of appropriate allowances for loan and lease losses or allowances for credit losses.
5. Internal Control Systems
The FFIEC highlights that prudent testing by internal control functions of a financial institution confirm:
- Accommodation terms are extended with appropriate approval.
- Additional accommodation options offered to borrowers are presented and processed in a fair and consistent manner and comply with applicable laws and regulations, including fair lending laws.
- Servicing systems accurately consolidate balances, calculate required payments, and process billing statements for the full range of potential repayment terms that exist once the accommodation periods end.
- Staff, including problem loan and collections personnel are qualified and can efficiently handle expected workloads.
- Borrower and guarantor communications, and legal documentation, are clear, accurate, and timely, and in accordance with contractual terms, policy guidelines, and federal and state laws and regulatory requirements.
- Risk rating assessments are timely and appropriately supported.
Understanding of the credit risk of the Borrower is key
Prudent accommodation decisions made by Financial Institutions ought to consider:
- applicable laws and regulations
- ability to ease cash flow pressures on the borrower
- ability to improve the Borrower’s capacity to service debt
- facilitate the financial institution’s ability to collet its debt
Financial Institutions ought to consult their Accounting and Regulatory Reporting specialist to ensure that their decisions made in loan accommodations are the right ones.