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On August 3, 2020, the Federal Financial Institutions Examination Council (FFIEC) member regulatory agencies (Agencies) released a “Joint Statement on Additional Loan Accommodations Related to COVID-19” (Joint Statement). The Joint Statement was intended to provide prudent risk management and consumer protection principles for use by financial institutions working with borrowers nearing the end of initial loan accommodations made in response to the pandemic. The accommodations in question may have been made under the CARES Act, state and local ordinances or emergency declarations, or institutional policies. The FFIEC Agencies encourage financial institutions to consider prudent accommodation options based on borrower credit risk and consistent with applicable laws and regulations that can improve borrower cash flow positions and debt service capacity while facilitating the institution’s ability to collect the debt, but expect financial institutions to establish appropriate monitoring, testing, and reporting functionality to provide management with accurate, complete, and timely information related to COVID accommodations and associated risks.
To facilitate timely recognition of credit deterioration and loss exposure, the Agencies recommend:
- Identifying, measuring, and monitoring the credit risk of loans receiving accommodations;
- Applying appropriate loan risk ratings or grades to modified exposures, while noting that reasonable accommodations may not result in adverse risk ratings if the borrower has the ability to meet the requirements of the modified loan;
- Making appropriate decisions on loan accrual status; and
- Ensuring effective management information systems and reporting provide management with the scope of loans receiving accommodations, types of initial and supplemental accommodations provided, accommodation periods, and associated credit risk, particularly in higher-risk portfolio segments.
To manage consumer protection risks, financial institutions should provide consumers with options for repaying missed payments at the end of the accommodation period. Some effective risk management approaches include:
- Providing additional affordable and sustainable accommodation options to borrowers where appropriate;
- Providing clear, transparent, and timely communications and disclosures regarding available accommodation options;
- Offering prudent changes to the terms of the credit product where appropriate;
- Communicating before the end of the initial accommodation period to provide adequate time for the borrower and financial institution to discuss next steps;
- Basing accommodation and loss mitigation options on consistent analyses of borrowers’ (and guarantors’, if applicable) ability to repay;
- Ensuring policies and procedures accurately reflect accommodation options offered by the institution and are consistent with applicable laws and regulations, including fair lending laws;
- Providing training to personnel responsible for operational and compliance processes related to accommodation options, including customer service personnel;
- Ensuring risk management, audit, complaint, and management information systems are adequate to evaluate compliance with laws, regulations, policies, and procedures; and
- In the event of servicing transfers, provide complete and accurate information to both borrowers and subsequent servicers and ensure post-transfer servicing is consistent with the borrower agreement and the borrower’s status at time of transfer.
Financial institutions must ensure accounting and regulatory reporting related to loan modifications is consistent with generally accepted accounting principles (GAAP) and regulatory reporting instructions. As applicable, institutions must maintain appropriate allowances for loan and lease losses (ALLL) or allowances for credit losses (ACL) and comply with section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). Management should consider the impact of COVID in estimating ALLL or ACL, and revise estimates as additional information becomes available. Loan past-due status should be determined by the revised contractual terms of a loan, while accrual status should be determined by regulatory reporting instructions and internal accounting policies.
Finally, financial institutions should ensure internal control systems, including quality assurance, credit risk review, compliance management systems, operational risk management, and internal audit provide prudent coverage of the risks related to loan accommodations, end of initial accommodation periods, and subsequent accommodations. Internal control testing should confirm appropriateness of accommodation terms, compliance with laws and regulations (including fair lending), accuracy of servicing systems, adequacy of staffing, reasonableness and timeliness of borrower and guarantor communications, and appropriateness of risk ratings.