- Develop effective policies and procedures now for loan workouts.
- Review loan files and documents.
- Prepare exit strategies for troubled loans.
Financial Needs Of Customers & Members Affected By COVID-19
On March 9, 2020, federal and state banking regulators issued a joint statement titled Agencies Encourage Financial Institutions to Meet Financial Needs of Customers and Members Affected by Coronavirus, urging financial institutions to work with borrowers impacted by COVID-19 (coronavirus).
Several industries are experiencing disruption that may affect their ability to comply with loan covenants and even affect their ability to make timely loan payments. A link to the release can be found here: https://www.fdic.gov/news/news/press/2020/pr20025.html
Specifically, the release states:
“Regulators note that financial institutions should work constructively with borrowers and other customers in affected communities. Prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”
The message regulators are sending is that banks should not strictly enforce loan obligations if a borrower is impacted by coronavirus. But the details of how banks do this, while still following safe and sound banking practices, are left to individual banks to determine. Among the questions you need to ask yourself are:
- How do you establish that a borrower is financially impacted by coronavirus?
- What are reasonable conditions to place on a borrower claiming such impact in exchange for your institution forbearing on its rights?
- What actions are consistent with safe lending practices, while at the same time address the expectations of the regulators?
Top Considerations To Avoid Disruption
Although banks are expected to work with their distressed borrowers, they must still follow safe lending practices. Unlike other economic disruptions, borrowers may assert novel defenses in loan workouts, such as the "impossibility doctrine" and force majeure clauses, that could unnecessarily complicate a loan workout. Consider implementing the following steps now as appropriate to address the expectations of regulators and potentially minimize any negative impacts arising from coronavirus:
- Review Policies & Procedures, Develop New Ones. Develop new written policies and procedures designed to identify and address issues with troubled loans at every stage of the lending process. This may include new criteria for board/management committee involvement, credit portfolio review, preparation/qualifications for loan workout counsel and professionals, and internal management of troubled credits.
- Review Your Loan Files & Documents. In addition to normal course credit monitoring, review and update the bank’s loan files, including loan documents, collateral searches, recorded mortgages and UCC filings, to stay ahead of any unexpected loan workout. You also should have legal counsel review “boilerplate” force majeure and similar clauses to ensure that you can enforce your loan documents.
- Prepare Exit Strategies. Look ahead to consider potential exit strategies, whether rehabilitating a credit or exiting it. Exit strategies include a note sale, liquidation, litigation, and restructuring.
We Can Help You
We can review loan files to ensure they contain necessary and proper documentation, that your collateral is secured and properly perfected, and an appropriate legal strategy is in place before the situation further deteriorates. We can also address defenses that borrowers may raise in light of coronavirus, including reliance on force majeure clauses.
Our legal advice and regulatory know-how can help ensure your bank vigilantly and prudently addresses its troubled loan assets in light of current events. We can help your bank develop strategies for addressing all of these issues before and during your next examination.
We strongly recommend that banks evaluate the following pandemic-related business and legal considerations that we have been discussing with our clients in the following Client Alerts:
- COVID-19 Insurance Coverage Considerations
- 10 Steps For Following Regulators’ COVID-19 Guidance
- Webinar: Is Your Bank's Pandemic Contingency Plan Ready For Implementation?