What do you do if you are a financial institution with COVID-19 loan arrangements near the end? | CPA and Foodman advisors

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On August 3, 2020, the Federal Financial Institutions Review Council (FFIEC) issued a joint statement on additional loan arrangements related to COVID-19 for loans that are approaching the end of an initial loan adjustment period. The FFIEC defines a home loan as “any agreement aiming to defer one or more payments, to make a partial payment, to refrain from any overdue amount, to modify a loan or a contract or to bring any other assistance or relief to a borrower who encounters a financial challenge ”.

FFIEC encourages financial institutions to work cautiously with borrowers who are or may not be able to meet their contractual payment obligations due to COVID-19

As loans near the end of the hosting period, FFIEC recommends the following five precautionary principles:

  1. Prudent risk management practices

This includes identifying, measuring and monitoring the credit risks of loans that receive housing, understanding the terms of loan agreements, and accurately monitoring housing conditions. Examples are payment changes, interest rate changes, and changed amortization terms.

2. Well structured and sustainable housing

Additional accommodation options may be prudent if a borrower continues to experience financial difficulties after the initial accommodation. Additionally, additional accommodations can help mitigate additional losses for the financial institution and help the borrower return to a sustainable repayment path over time.

3. Consumer protection

FFIEC states that effective risk management approaches include:

  • Provide additional accommodation options to borrowers that are affordable and durable.
  • Provide clear, visible and accurate communications and disclosures to inform borrowers of available options.
  • Provide these communications and disclosures in a timely manner.
  • Base eligibility and payment terms on consistent analyzes of borrowers’ financial situation and their reasonable repayment capacity.
  • Ensure that policies and procedures reflect the hosting options offered by the financial institution and promote consistency with applicable laws and regulations, including fair loan laws.
  • Provide appropriate training to employees and others responsible for compliance and operational procedures related to any additional hosting options, including customer service staff. Ensure that risk monitoring, auditing and consumer complaints systems are adequate to assess compliance with applicable laws, regulations, policies and procedures.
  • Provide complete and accurate information to borrowers and subsequent service providers during loan transfers and ensure that the post-transfer service is in accordance with the agreement with the borrower and the borrower’s status at the time of the transfer.

4. Accounting and regulatory reporting

Financial institutions should follow applicable accounting and regulatory requirements for all loan modifications, as the term “modification” is used in United States generally accepted accounting principles (GAAP) and regulatory reporting instructions. This includes additional changes to borrowers who may continue to experience financial hardship after the initial adjustment period ends. This involves maintaining appropriate provisions for loan and rental losses or provisions for credit losses.

5. Internal control systems

The FFIEC emphasizes that prudent tests carried out by the internal control functions of a financial institution confirm:

  • Accommodation conditions are extended with the appropriate approval.
  • Additional accommodation options available to borrowers are presented and treated in a fair and consistent manner and comply with applicable laws and regulations, including fair loan laws.
  • Maintenance systems accurately consolidate balances, calculate required payments, and process billing statements for all of the potential repayment terms that exist after hosting periods have ended.
  • Staff, including problem loans and collections staff, are qualified and can effectively handle expected workloads.
  • Borrower and Guarantor communications, as well as legal documentation, are clear, precise and timely, and in accordance with contractual terms, policy guidelines, federal and state laws, and regulatory requirements.
  • Risk rating assessments are completed in a timely manner and adequately supported.

Understanding the borrower’s credit risk is essential

Prudent accommodation decisions made by financial institutions must take into account:

  • applicable laws and regulations
  • ability to alleviate pressures on borrower’s cash flow
  • ability to improve the borrower’s ability to service the debt
  • facilitate the ability of the financial institution to collect its debt

Financial institutions should consult with their accounting and regulatory reporting specialist to ensure that their lending decisions are the right ones.


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