FFIEC issues new guidelines on credit adjustments related to COVID-19 | Butler Snow LLP

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At the beginning of the pandemic, many financial institutions offered borrowers credit options such as short-term deferrals and other loan changes in response to the significant negative impact of COVID-19. After this initial grace period has expired, the Federal Audit Board of Financial Institutions (the “FFIEC“Which consists of the CFPB, the FDIC, the Federal Reserve, the NCUA, and the OCC has one Joint statement on additional credit adjustments in connection with COVID-19 (the “Joint announcement“To provide principles for financial institutions to follow when working with borrowers in lending.

In general, the Joint Declaration encourages financial institutions to work with borrowers affected by the pandemic and notes that the FFIEC will not criticize prudent credit risk mitigation. The principles set out in the Joint Declaration apply to commercial and private credit agencies and are in line with the inter-agency guidelines for setting standards for security and reliability. In addition, the principles should be tailored to the financial institution based on the size, complexity, risk profile of the loan portfolio and the industry and business focus of its customers. The joint statement you can find here, contains the following principles that banks should consider.

I. Prudent risk management

The Joint Declaration encourages financial institutions to apply prudent risk management practices while taking steps to assist borrowers, including identifying, measuring and monitoring the credit risk of loans that are receiving arrangements and using loan risk ratings or classes and making reasonable decisions about the loan Provision status for loans taken out as a result of the pandemic.

When conducting placements, the Joint Declaration encourages financial institutions to take steps to provide borrowers and guarantors with clear, accurate and timely information about the placement.

II. Well structured and sustainable accommodation

For clients who face persistent challenges after placement, the Joint Declaration encourages banks to consider well-designed and consistently applied placement options to minimize losses to the financial institution. Additional accommodation options, accompanied by prudent risk management practices, can help clients resume structured, affordable and sustainable repayment of contractual amounts over a reasonable period of time.

The Joint Declaration provides that it is generally appropriate for financial institutions to rate any loan on the basis of the fundamental risk characteristics that affect the collectibility of that particular loan.

III. Consumer protection

The Joint Declaration also encourages financial institutions to offer their customers the ability to repay missed payments at the end of an adjustment in order to avoid defaults or other adverse consequences. Where appropriate, financial institutions are also encouraged to offer their customers options to customize the terms of the loan product to support sustainable and affordable payments over the long term. The Joint Declaration recommends the following approaches to risk management as effective for consumer protection:

  • Providing affordable and sustainable additional housing;
  • Provide clear, eye-catching, and accurate communication and disclosure of the options available;
  • Providing notices and disclosures in a timely manner to allow sufficient time for the borrower and the financial institution to consider next steps;
  • Eligibility and payment terms based on consistent analysis of borrowers’ financial condition and reasonable repayment ability;
  • Ensure that policies and procedures reflect the accommodation options offered by the financial institution and promote compliance with applicable laws and regulations;
  • Provide appropriate training to employees who are responsible for compliance and operational procedures related to additional accommodation options;
  • Ensure that risk monitoring, audit and consumer complaint systems are adequate to assess compliance with applicable laws, regulations, policies and procedures; and
  • Providing complete and accurate information to borrowers and subsequent borrowers during loan transfer and ensuring post-transfer service is consistent with the agreement with the borrower and the status of the borrower at the time of transfer.

Accounting and regulatory reporting

The Joint Declaration also addresses accounting and regulatory reporting issues. Financial institutions should follow applicable GAAP accounting and regulatory reporting requirements for loan changes. If a financial institution has opted for a loan modification under Section 4013 of the CARES Act (“Temporary Relief for Problematic Debt Restructuring”), an additional loan modification under Section 4013 could also be considered.

If a financial institution does not decide to consider a loan change under Section 4013 or if a loan change under Section 4013 is not permitted, the Joint Declaration provides that additional changes should be considered cumulatively to determine whether the additional change is a TDR.

Internal control systems

Finally, the Joint Declaration provides that financial institutions should maintain internal control systems that cover every phase of borrowing, including quality assurance, credit risk review, operational and compliance risk management, and internal audit functions.

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