At the onset of the pandemic, many financial institutions offered credit accommodations, such as short-term deferrals and other loan modifications, to borrowers in response to the significant adverse impact caused by COVID-19. As these initial deferral periods reach their end, the Federal Financial Institutions Examinations Council (the “FFIEC”), which is comprised of the CFPB, the FDIC, the Federal Reserve, the NCUA, and the OCC, has issued a Joint Statement on Additional Loan Accommodations Related to COVID-19 (the “Joint Statement”) to provide principles for financial institutions to consider when working with borrowers on loan accommodations.
Generally, the Joint Statement encourages financial institutions to work with borrowers affected by the pandemic and states that the FFIEC will not criticize any prudent credit risk mitigation. The principles outlined in the Joint Statement apply to commercial and retail loan accommodations and are consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness. Also, the principles are intended to be tailored to the financial institution based on size, complexity, loan portfolio risk profile, and the industry and business focus of its customers. The Joint Statement, which can be found here, includes the following principles for banks to consider.
I. Prudent Risk Management Practices
The Joint Statement encourages financial institutions to employ prudent risk management practices while taking steps to support borrowers, including identifying, measuring, and monitoring credit risk of loans receiving accommodations and utilizing risk ratings or grades for loans and making appropriate accrual status decisions on loans taken out as a result of the pandemic.
When executing accommodations, the Joint Statement encourages financial institutions to take steps to provide clear, accurate, and timely information to borrowers and guarantors regarding the accommodation.
II. Well-Structured and Sustainable Accommodations
For customers experiencing ongoing challenges after an accommodation, the Joint Statement encourages banks to consider well-designed and consistently applied accommodation options to minimize losses to the financial institution. Additional accommodation options, accompanied by prudent risk management practices, can help customers resume structured, affordable, and sustainable repayment of amounts contractually due over a reasonable timeframe.
The Joint Statement provides that it is generally appropriate for financial institution to assess each loan based upon the fundamental risk characteristics affecting the collectability of that particular credit.
III. Consumer Protection
The Joint Statement also encourages financial institutions to provide customers with available options for repaying missed payments at the end of any accommodation to avoid delinquencies or other adverse consequences. When appropriate, financial institutions are also encouraged to provide customers with options for modifying the terms of the credit product to support sustainable and affordable payments for the long term. The Joint Statement recommends the following approaches to risk management as effective for protecting consumers:
- Providing affordable and sustainable additional accommodation options;
- Providing clear, conspicuous, and accurate communications and disclosures of the available options;
- Providing communications and disclosures in a timely manner to allow adequate time for the borrower and financial institution to consider next steps;
- 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;
- Providing appropriate training to employees responsible for compliance and operational procedures related to any additional accommodation options;
- Ensuring that risk monitoring, audit, and consumer complaint systems are adequate to evaluate compliance with applicable laws, regulations, policies, and procedures; and
- 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.
Accounting and Regulatory Reporting
The Joint Statement also addresses issues related to accounting and regulatory reporting. Financial institutions should follow applicable accounting and regulatory reporting requirements for loan modifications in accordance with GAAP. Also, if a financial institution elected to account for a loan modification under Section 4013 of the CARES Act (“Temporary Relief from Troubled Debt Restructurings”), an additional loan modification could also be eligible under Section 4013.
If a financial institution does not elect to account for a loan modification under Section 4013 or a loan modification is not eligible under Section 4013, the Joint Statement provides that additional modifications should be viewed cumulatively in determining whether the additional modification is a TDR.
Internal Control Systems
Finally, the Joint Statement provides that financial institutions should maintain internal control systems that cover each stage of a loan accommodation, including quality assurance, credit risk review, operational and compliance risk management, and internal audit functions.