No one can predict all the effects of the pandemic on the borrower/lender relationship, but some of those effects will be severe. Both parties place a high value on predictability in their dealings. A borrower must know that when it needs funds, the line of credit will be available, while a financial institution needs to have payments made and covenants met as provided in the financing documents. Its long term survival depends on it. The battle against the virus, with its shut down of businesses, employment furloughs and layoffs, supply chain complications, and the resulting market volatility, leaves lenders and borrowers in uncharted territory.
Regulators send a consistent message to financial institutions: work with customers affected by COVID-19 in a prudent manner, including modifying terms of existing loans for affected customers. However, the guidance begs the question of what is prudent in the context of this novel threat. As much as a financial institution cares about borrowers and other customers, its primary legal and ethical obligation is to depositors.
The great breadth of the adverse effects of the COVID-19 response - almost no business, small or large, goes untouched - makes it difficult for lenders to tailor relief efforts for a particular customer. Governments have urged or imposed blanket forbearance periods. For example, the New York Department of Financial Services has issued a directive to New York State mortgage servicers to provide 90-day mortgage relief to mortgage borrowers affected by the novel coronavirus. It may also instruct state chartered banks to waive ATM fees, late fees, overdraft fees, and fees for credits cards. A bill introduced in the U.S. Senate aims to enact The Disaster Protection for Workers’ Credit Act providing for an immediate four-month moratorium on all negative credit reporting and longer protections for people who face lasting financial hardship from the outbreak.
Moratoria on collections efforts led by government agencies probably will not be sufficient. Lenders should reserve all rights and remedies and patch documentation and collateral deficiencies, to the extent feasible, during the pause. Forbearance and change-in-terms agreements, including interest-only periods and skip payment options, establish new ground rules for what comes next, after this period. A one-size-fits-all approach may be necessary for certain classes of borrowers, given the size of the problem. Other credits will warrant custom arrangements. Clear, precise language in the documents will be critical.
