- Review your bank’s loan polices.
- Trust but verify your borrowers’ current financial condition and prospects.
- Review your loan collateral, files, and documents.
- Prepare loan resolution strategies.
Regulators Encourage Banks To Continue To Work With Borrowers – Is Your Bank Ready For The Next Loan Deferral Wave?
On August 3, 2020, federal and state banking regulators issued a joint statement titled Joint Statement on Additional Loan Accommodations Related to COVID-19. A link to the release can be found here:
In March, federal and state regulators encouraged banks to accommodate their commercial and consumer borrowers during the initial impact of the COVID-19 pandemic by extending short-term deferrals and other loan modifications (see our Client Alert on the subject here: newsroom-publications-377). Now, as these initial deferral periods are ending, federal and state regulators have released additional guidance, suggesting banks should “consider prudent accommodation options” to borrowers impacted by COVID-19, that places additional burdens on banks. For example, the regulators are suggesting that banks should do the following prudently and in a safe and sound manner:
- Not strictly enforce loan obligations if a borrower is impacted by COVID-19;
- Consider additional accommodations to borrowers;
- Communicate more with borrowers; and
- For consumer borrowers, strictly follow consumer protection principles.
Given the tension between the regulators’ directive to accommodate borrowers, while mandating doing so in a safe and sound manner, you should consider the following when reviewing any borrower request for a further deferral or loan modification:
- Review your loan polices. Given the regulators’ current emphasis on prudent risk management practices and consumer protection principles, are your bank’s policies updated and are they being followed?
- Trust but verify your borrowers’ current financial condition and prospects. Did the borrower receive any government-sponsored assistance, such as any CARES Act grants, Paycheck Protection Program (“PPP”) loans, an Economic Injury Disaster Loan (“EIDL”), or other state or local grant or aid? How did they utilize any such assistance? Can you verify whether your borrower is still operating or employed? What are the borrower’s short-, mid-, and long-term prospects? Are their financial statements and projections accurate?
- Review your loan collateral, files and documents. What is the current state of any collateral? Should you consider taking additional collateral? Are your loan files documented? Are you protecting the bank by using the appropriate loan documentation? Do the actions in your loan files match your loan policies?
- Prepare loan resolution strategies. Are you considering all potential loan resolution strategies, such as refinancing through government lending programs, refinancing out of the bank, selling the note, liquidating the credit, or litigation enforcement?
By considering these steps now and implementing them as appropriate, your bank will minimize any potential negative impacts arising from the ongoing pandemic. Indeed, taking these steps now will prepare your bank to address regulators’ expectations of balancing the needs of borrowers while keeping your bank safe and sound and preparing for your next examination.
We Can Help You
We can assist you with your lending policies. We can also supplement and support the bank’s internal review of deferred loans, by reviewing loan files to ensure that they contain necessary and proper documentation, that your collateral is secured and properly perfected, and that an appropriate legal strategy is in place before the situation further deteriorates. Our legal advice and regulatory know-how can help ensure that your bank vigilantly and prudently addresses its troubled loan assets in light of current events. Finally, we can help your bank develop strategies for addressing all of these issues before and during your next examination.
We recommend you evaluate the following pandemic-related business and legal considerations that we have been discussing with our clients:
- Nicholas H. Callahan
- Joseph T. Ceithaml
- Bill Fay
- Robert M. Fleetwood
- John E. Freechack
- John M. Geiringer
- Katherine Fritzi Getz
- Edward F. Malone
- Brent McCauley
- Abdul R. Mitha
- Stanley F. Orszula
- Neil R. Patel
- W. Scott Porterfield
- Brandon C. Prosansky
- John "Jack" W. Roberts
- Andrea L. Sill
- Jack Snyder
- Karol K. Sparks
- Dennis R. Wendte
- Steven J. Yatvin