The Federal Financial Institutions Examination Council (FFIEC) recently issued a joint statement providing prudent risk management and consumer protection principles for financial institutions to consider when working with borrowers as the initial COVID-19 related loan accommodation periods come to an end.
In the statement, the FFIEC states that it has encouraged financial institutions to work with borrowers who are or may be unable to meet their contractual payment obligations because of COVID-19. The FFIEC also provides that financial institutions should consider prudent accommodation options that: (i) are based an understanding of the borrower’s credit risk; (ii) are consistent with applicable laws and regulations; (iii) can ease cash flow pressures on affected borrowers; and (iv) improve a financial institution’s capacity to service debt and facilitate its ability to collect on its loans.
As noted in the statement, “[p]rudent risk management practices include identifying, measuring, and monitoring the credit risks of loans that receive accommodations.” Additionally, sound credit risk management includes applying loan risk ratings or grades and making sound accrual status decisions on loans for borrowers impacted by COVID-19.
Any accommodations made for affected borrowers should be well-structured and sustainable, especially for borrower’s who may continue to experience financial difficulties after the initial accommodation is made. This approach should also help minimize any losses to the financial institution resulting for the offered accommodations. While institutions are encouraged to be helpful and flexible in working with borrowers during this time, they must continue to follow all applicable accounting and regulatory reporting requirements for all loan modifications made for borrowers experiencing ongoing hardship. Financial institutions working with borrowers should also provide clear and timely information regarding accommodations to both them and guarantors about contacting servicers to determine which options best suit the borrower’s needs.
Further, the FFIEC notes that prudent risk management practices in connection with loan accommodations include quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions that are commensurate with the size, complexity, and risk of the financial institution’s activities. Such internal control functions usually include targeted testing of the process for managing each stage of the accommodation.