Financial Institutions Encouraged to Consider Additional Options for Consumer and Commercial Borrower Accommodations | Morgan Lewis – All Things FinRe…August 7, 2020
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…