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On Loan Accommodations (Commentary)

2 min read

On Aug. 3, the Federal Financial Institutions Examination Council issued a statement addressing additional loan accommodations related to COVID-19. As borrowers near the end of initial accommodation periods, the FFIEC encourages financial institutions to consider arrangements that might mitigate adverse effects. Specifically, the council promoted the following practices:

Prudent risk management practices. The FFIEC describes these as identifying, measuring and monitoring the credit risks of loans that receive accommodations. These practices enable lenders to recognize any deterioration or loss exposure in a timely manner and help ensure lenders understand the scope of loans that received an accommodation, the types of additional accommodations provided, when the accommodation periods end and the credit risk of potential higher-risk segments.

Well-structured and sustainable accommodations. Financial institutions should consider additional accommodation options for borrowers that continue to experience financial challenges. The FFIEC encourages lenders to assess each loan based upon the fundamental risk characteristics affecting collectability. Factors to consider may differ for commercial and retail loans, but lenders should generally review repayment capacity, collateral values and the borrower’s actual and projected cash flows.

Consumer protection. The FFIEC encouraged lenders to provide borrowers with options to avoid delinquencies or other adverse consequences. An effective approach to consumer protection might include: allowing borrowers to repay missed payments, providing informative disclosures to borrowers in a timely manner, basing terms on borrower’s financial condition and capacity to repay, providing appropriate training to employees on additional accommodations, ensuring proper systems are in place to assess compliance with applicable laws and providing accurate and consistent services during and after loan transfers.

Accounting and regulatory reporting. The FFIEC reminded financial institutions that they must follow applicable accounting and regulatory reporting requirements for all loan modifications. This includes maintenance of allowances for loan and lease losses or allowances for credit losses. Financial institutions have received reporting options to account for the effects of COVID-19.

Robert T. Smith heads the Finance & Commercial Transactions Practice Group at the Friday Eldredge & Clark law firm, where Madeline O. McElhanon is an associate.
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