Updated COVID-19 Loan Accommodations Guidance Released for Financial Institutions

Prudent risk management and consumer protection principles are topics covered in a joint statement released on Aug. 3, 2020 by the Federal Financial Institutions Examination Council. The joint statement provides this guidance as financial institutions work with borrowers on the continuation loan accommodations that will likely be needed throughout the ongoing economic crisis.

Accommodations outlined in this interagency statement include:

  • agreement to defer one or more payments,
  • making a partial payment,
  • forbear any delinquent amounts,
  • modify a loan or contract or provide other assistance or relief to a borrower who is experiencing a financial challenge

Prudent risk management

The statement addresses the need for institutions to further apply “prudent accommodation options” for their borrowers. From a practice aspect, prudent risk management should include identifying, measuring, and monitoring their institutions’ risks within the loan portfolio. When a financial institution considers whether to offer further accommodations to a borrower, it is common for the financial institution to assess each individual loan based upon the factors affecting the expected collectability.

Reasonable accommodations

In addition, as the accommodations are made, they should be well-designed and consistently applied with the intent to minimize losses to the financial institution, while at the same time assisting borrowers to be able to resume an affordable and sustainable repayment that is appropriately structured. This is likely to include significant reliance on internal projects over a longer period based on the continued uncertainty.

Consumer protection

From a consumer-protection standpoint, the statement reiterates that financial institutions are encouraged to provide consumers with available options for repaying any missed payments at the end of their accommodation to avoid delinquencies or other adverse consequences. In addition, institutions should provide consumers with options for making “prudent” changes to the terms of the borrowings to support sustainable and affordable payments for the long-term where reasonably appropriate. The statement provides a list of what those risk management practices may incorporate to provide an effective approach to responding to borrowers.

Financial reporting

Next, the statement addresses some of the accounting and reporting implications that would need further considerations as a part of these continued accommodations. As the economic impacts continue for borrowers, the accommodations roll into reporting impacts. The agencies therefore recognize the need to continue to address the accounting related to this. This was initially addressed in the regulatory reporting instructions, section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings” (section 4013), and the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” (Interagency Statement).

The ability to precisely determine the collectability of loans impacted by the COVID crisis will continue to be a challenge. As section 4013 allows for an institution to elect for a loan modification, an additional modification could also be eligible under Section 4013. As it states, and continues to be the case, for a loan to be classified under this election, it must:

  • relate to the COVID event;
  • be for a loan that was not more than 30 days past due as of Dec. 31, 2019; and
  • be modified or extended between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) Dec. 31, 2020.
  • Additional considerations are also discussed within the statement to ensure appropriate and consistent reporting.

This maintenance of appropriate allowances for loan and lease losses (ALLL) or allowances for credit losses (ACL), as applicable, must also be considered. Appropriate ALLL or ACL methodologies, as applicable, consider all relevant and available information when assessing the collectability of cash flows, including changes in borrower financial condition, collateral values, lending practices, and economic conditions as a result of the COVID event. Borrowers facing identified financial difficulties as they near the end of the accommodation periods generally pose greater credit risk. According to GAAP, loans are to be segmented into a separate portfolio when they share similar risk characteristics for the purposes of estimating credit losses, unless they are evaluated on an individual basis.

Risk management

Finally, the statement looks at ensuring the practices that result from the loan modifications have adequately considered the control environment as a part of risk management and continued overall safety and soundness of the financial institution.

To view the full interagency statement, refer to the attached link.

Please reach out to your Rehmann advisor with any questions relating to this latest guidance. You also may contact us at info@rehmann.com.

Published in COVID-19

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