Citing the “significant adverse impact on consumers, businesses, financial institutions, and the economy,” the Federal Financial Institutions Examination Council on Tuesday outlined principles for financial institutions to consider while working with borrowers as loans near the end of initial loan accommodation periods under the CARES Act.
The FFIEC, which includes the NCUA, encouraged in a statement that financial institutions should work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of COVID-19.
“While some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to meet their obligations due to continuing financial challenges,” the FFIEC members said in the statement. The FFIEC members also recognize that “some financial institutions may face difficulties in assessing credit risk due to limited access to borrower financial data, COVID event-induced covenant breaches, and difficulty in analyzing the impact of COVID event-related government assistance programs.”
The FFIEC members are encouraging financial institutions to consider:
- prudent accommodation options that are based on an understanding of the credit risk of the borrower;
- options that are consistent with applicable laws and regulations; and,
- options that can ease cash flow pressures on affected borrowers, improve their capacity to service debt, and facilitate a financial institution’s ability to collect on its loans.
Such arrangements may mitigate the long-term impact of a financial challenge on borrowers by avoiding delinquencies or other adverse consequences, while imprudent practices can adversely affect borrowers and expose financial institutions to increases in credit, compliance, operational and other risks as well as present risks to a financial institution’s capital, according to the statement.
In addition to NCUA, the FFIEC includes representatives from the Federal Reserve, CFPB, FDIC, OCC and SLC. The full FFIEC statement can be accessed by clicking here.