On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement to provide prudent risk management and consumer protection principles for financial institutions to consider when working with borrowers as consumer and business loans near the end of initial loan accommodation periods during the coronavirus pandemic. The guidance notes that the principles outlined in the joint statement apply to both commercial and retail loan accommodations and are consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness. Furthermore, the principles are intended to be tailored to a financial institution’s size, complexity and loan portfolio risk profile, as well as the industry and business focus of its customers or members.
The joint statement recognizes the significant adverse impact that the COVID-19 crisis has had on consumers, businesses, financial institutions, and the U.S. economy. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) provided several forms of financial relief to businesses and individual borrowers, and some states and localities have provided similar credit accommodations. Many financial institutions have also offered voluntary credit accommodations to borrowers.
The FFIEC members reiterate their prior guidance, the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) dated April 7, 2020 (“Interagency Statement on Loan Modifications”), that encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual loan payment obligations because of COVID-19. Specifically, that guidance stated that loan accommodations are generally viewed as positive actions that can mitigate adverse impacts on borrowers.
The joint statement notes that while some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to do so due to continuing financial challenges. The FFIEC members encourage financial institutions to consider prudent accommodation options that are based on an understanding of the borrower’s credit risk, consistent with applicable laws and regulations, and designed to ease cash flow pressures on affected borrowers while improving their capacity to service debt and facilitating a financial institution’s ability to collect on its loans. Such arrangements may mitigate long-term borrower financial impacts by avoiding delinquencies or other adverse consequences.
FFIEC members encourage financial institutions to observe several risk management and consumer protection principles to work with borrowers in a safe and sound manner as loans near the end of accommodation periods, as described below. Importantly, the guidance recommends that financial institutions should ensure that clear, accurate and timely information is provided to both borrowers and guarantors regarding any accommodation.
- Prudent risk management practices: Such practices include identifying, measuring, and monitoring credit risk for loans that receive accommodations. Monitoring and assessing the terms of loan accommodations on an ongoing basis enables financial institutions to recognize any credit deterioration and loss exposure in a timely manner. The guidance also recommends effective management reporting to ensure that the management team fully understands the scope of loans that received an accommodation, the types of initial and any additional accommodations provided, when the accommodation periods end, and credit risk for higher-risk segments of the institution’s loan portfolio.
- Well-structured and sustainable accommodations: The guidance recommends that a financial institution’s determination of whether to consider additional accommodation options for a borrower should be based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower. Additional accommodations should be well-designed and consistently applied to mitigate losses both for the borrower and the financial institution while helping the borrower resume structured, affordable and sustainable repayment of amounts contractually due over a reasonable period of time.
- Consumer protection: The guidance encourages financial institutions to provide consumers with available options for repaying any missed payments at the end of their accommodation to avoid delinquencies or other adverse consequences. Financial institutions are also encouraged, where appropriate, to provide consumers with options for making prudent changes to credit product terms to support sustainable and affordable long-term payments. The guidance also recommends several effective approaches to consumer protection risk management.
- Accounting and regulatory reporting: The guidance advises financial institutions to follow applicable accounting and regulatory reporting requirements for all loan modifications as the term “modification” is used in generally accepted accounting principles (GAAP) and regulatory reporting instructions, which includes maintenance of appropriate allowances for loan and lease losses (ALLL) and allowances for credit losses (ACL), as applicable. The guidance also advises financial institutions to consult Section 4013 of the CARES Act (Temporary Relief from Troubled Debt Restructurings) and the Interagency Statement on Loan Modifications.
- Internal control systems: Controls should include quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions that are commensurate with the size, complexity and risk of a financial institution’s activities. Targeted testing of the process for managing each stage of the accommodation is also advisable. The guidance notes that if these functions are outsourced, a financial institution remains responsible for oversight of the service provider.