“Borrowers facing identified financial difficulties as they near the end of the accommodation periods generally pose greater credit risk.”
On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement with further guidance regarding COVID-19 loan modifications, as Borrowers are nearing the end of their initial accommodation/deferment period and are approaching Banks requesting additional accommodations due to COVID-19. The guidance is applicable to both commercial and consumer loans. The guidance is intended to be “tailored” to a financial institution’s size, overall complexity, as well as risk profile.
The FFIEC has encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations. In working with borrowers through the COVID-19 Pandemic, the FFIEC guides Institutions to adhere to the following principles when making additional accommodations for borrowers:
- Any actions should be made only after a full understanding of the credit risk involved with the borrower
- Any actions taken should be in alignment with the applicable laws and regulations
- May ease cash flow pressures on affected borrowers while improving the borrowers’ ability to service debt,
- Any actions taken by an Institution should facilitate a financial institution’s ability to collect on its loans.
The guidance states that “following an accommodation, a financial institution reviews the risk rating for each loan based on a borrower’s current debt level, current financial condition, repayment ability, and collateral”. Considering an Institutions challenges in assessing the present credit risk without updated borrower financial information, guidance outlines a utilizing projected financial performance when making accommodation & underwriting decisions.
Regulatory expectations are to have a timely assessment of a borrower’s current & projected financial health and cash flow as well as an assessment of if/how present economic conditions may have affected collateral values. An adverse loan grade will not be predicated based solely on a decrease in collateral margin, but loan files should be documented – with a focus on the borrower’s current cash flow & debt service ability.
Accounting & Regulatory Reporting
Financial institutions must follow applicable accounting and regulatory reporting requirements for all loan modifications. Generally accepted accounting principles (GAAP) and regulatory reporting instructions, including additional modifications made to borrowers who may continue to experience financial hardship at the end of the initial accommodation period. Includes maintenance of appropriate allowances for loan and lease losses (ALLL) or allowances for credit losses (ACL), as applicable.
Although, section 4013 of the CARES ACT provides financial institutions the option to temporarily suspend certain TDR GAAP requirements. This pertains to the initial accommodations period as well as further accommodations made for the same borrowers affected by COVID-19.
