The Federal Financial Institutions Examination Council (FFIEC) on behalf of its members issued a statement on August 3 setting forth prudent risk management and consumer protection principles for financial institutions as initial coronavirus (COVID-19) related loan accommodation periods end and they consider additional accommodations.
The FFIEC is an interagency body composed of five banking regulators (FRB, FDIC, NCUA, OCC, and CFPB) that is empowered to prescribe uniform principles, standards, and report forms to promote uniformity in the supervision of financial institutions. The principles in the statement follow on the heels of previous statements the FFIEC issued encouraging financial institutions to work prudently with borrowers affected by COVID-19.
To address the significant adverse impacts that the COVID-19 pandemic has had on consumers, businesses, financial institutions, and the economy, the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act) provided several forms of relief to businesses and borrowers, and some states and localities have provided similar credit accommodations. Also, many financial institutions have voluntarily offered other credit accommodations to their borrowers.
In addition, the FFIEC members have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of COVID-19. Specifically, the FFIEC members have stated that they view loan accommodations as positive actions, which can mitigate adverse effects on borrowers caused by COVID-19.
While some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to meet their obligations due to continuing financial challenges. “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 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.
The FFIEC suggested the following key principles.
PRUDENT RISK MANAGEMENT PRACTICES
- Financial institutions should identify, measure, and monitor the credit risks of loans that receive accommodations.
- Effective management information systems and reporting can also help a financial institution ensure that its management understands the credit risks.
WELL-STRUCTURED AND SUSTAINABLE ACCOMMODATIONS
- Financial institutions should consider each borrower’s financial condition and repayment capacity and assess whether current conditions have affected collateral values or the strength of guarantees, if applicable.
- For a commercial or retail loan, this would also include the financial institution evaluating both actual and projected cash flows of a borrower’s business.
- Financial institutions are encouraged to provide consumers with the following:
- Available options for repaying any missed payments at the end of their accommodations to avoid delinquencies or other adverse consequences.
- Options for making prudent changes to the terms of the credit product to support sustainable and affordable payments for the long term.
- Timely, clear, conspicuous, and accurate communications and disclosures.
- Financial institutions should ensure that their policies and procedures, as well as risk monitoring, audit, and consumer complaint systems, promote consistency with applicable laws and regulations, including fair lending laws.
- Financial institutions should also provide appropriate employee training.
INTERNAL CONTROL SYSTEMS
- Financial institutions should ensure that their quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions act appropriately, accurately, prudently, and consistently with applicable laws, regulations, and the financial institution’s policies and procedures.
- Even when a financial institution outsources all or a portion of these functions, the financial institution remains responsible for ensuring that the service provider acts consistently with applicable laws, regulations, and the financial institution’s policies and procedures.
The FFIEC stated that these principles are generally applicable to both commercial and retail loan accommodations and 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.
Financial institutions already must comply with applicable laws and regulations in considering borrowers’ requests, including Section 4022 of the CARES Act, and we expect that additional borrower protections concerning forbearance extensions and suspensions of foreclosures and evictions will be included in any impending stimulus package.
In our view, this statement will likely lead to state attorneys general and banking/financial services regulators prodding nonbank lenders and mortgage servicers to do the same. The statement is consistent with the positions the New York attorney general is currently taking with nonbank servicers. Additionally, the Iowa and California attorneys general are already leading a working group to restart what they did during the last financial crisis, e.g., to push every aspect of the lending system to make it easier for borrowers to obtain deferrals and principal reductions.