By Robert T. Smith and Madeline O. McElhanon
On August 3, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued a joint statement addressing additional loan accommodations related to Covid-19. As borrowers near the end of initial loan accommodation periods, the FFIEC encourages financial institutions to consider loan arrangements that might mitigate adverse effects on borrowers. Specifically, the FFIEC promoted the following practices:
Prudent Risk Management Practices. The FFIEC describes prudent risk management practices as identifying, measuring, and monitoring the credit risks of loans that receive accommodations. These practices enable lenders to recognize any deterioration or loss exposure in a timely manner and help ensure lenders understand the scope of loans that received accommodation, the types of additional accommodations provided, when the accommodation periods end, and the credit risk of potential higher-risk segments.
Well-Structured and Sustainable Accommodations. Financial institutions should consider additional accommodation options for borrowers that continue to experience financial challenges after initial accommodation. The FFIEC encourages lenders to assess each loan based upon the fundamental risk characteristics affecting collectability. Factors to consider when determining whether to extend an additional accommodation may differ for commercial and retail loans, but lenders should generally review repayment capacity, current collateral values, the strength of guarantees, and actual and projected cash flows of a borrower’s business.
Consumer Protection. The FFIEC encouraged financial institutions to provide borrowers with options to avoid delinquencies or other adverse consequences. An effective approach to consumer protection might include: allowing borrowers to repay missed payments, offering additional accommodations, providing informative disclosures to borrowers in a timely manner, basing terms on borrower’s financial condition and capacity to repay, providing appropriate training to employees on additional accommodations, ensuring proper systems are in place to assess compliance with applicable laws, and providing accurate and consistent services during and after loan transfers.
Accounting and Regulatory Reporting. The FFIEC reminds financial institutions that they must follow applicable accounting and regulatory reporting requirements for all loan modifications. This includes maintenance of allowances for loan and lease losses or allowances for credit losses. Section 4013 of the CARES Act and the Interagency Statement provides financial institutions with accounting and regulatory reporting options to account for the effects of Covid-19.
Internal Control Systems. Internal control functions like quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions should be in place to manage each stage of accommodation. These internal control functions must be prudently tested to ensure accommodations are processed with appropriate approvals, in a fair and consistent manner, that bank staff are equipped to handle accommodations, and that risk ratings assessments are adequately supported.
If you have any questions, please contact one of our attorneys for assistance.
Robert T. Smith heads the Finance and Commercial Transactions Practice Group. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters.
Madeline O. McElhanon is an associate in the Finance & Commercial Transactions Practice Group where she advises banking and other corporate clients on transactional, tax, securities and regulatory matters.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.