On November 12, 2008, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision (the “Agencies”) issued the “Interagency Statement on Meeting the Needs of Creditworthy Borrowers” (the “Statement”). The Statement was issued in light of the recent Treasury Department Capital Purchase Program and FDIC Temporary Liquidity Guarantee Program, which the Statement notes are designed to strengthen the capital foundation of the U.S. financial system and improve the overall functioning of credit markets. However, the Statement emphasizes its applicability to all banking organizations regardless of their participation in either program.
The Statement notes that the ongoing financial and economic stress has highlighted the crucial role that bank lending plays in the economic welfare of the United States. The Statement indicates that the recent programs are designed to support responsible lending activities, enhance the ability to fund lending and allow banking organizations to better meet credit needs. The Statement further provides that “[a]t this critical time it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met.” In support of that goal, the Statement sets out certain of the Agencies’ expectations of banking organizations in the current environment, as follows:
- The Agencies expect all banking organizations to fulfill their fundamental role in the economy as credit intermediaries to businesses, consumers and other creditworthy borrowers. The Statement deems it “essential” that banking organizations provide credit in a manner consistent with prudent lending practices and continue to consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers’ repayment capacities. Agency supervisory staffs have been directed “to be mindful of the procyclical effects of an excessive tightening of credit availability and to encourage banking organizations to practice economically viable and appropriate lending activities.”
- The Statement sets forth the Agencies’ expectation that banking organizations implement “effective and efficient capital planning and longer-term capital maintenance.” That includes an assessment of risks, development of risk management processes to mitigate the risks, evaluation of capital adequacy relative to the risks and consideration of the potential impact on earnings and capital from economic downturns. The Statement notes that effective capital planning also requires timely recognition of losses on bank assets and activities, maintaining adequate loan loss provisions and adherence to prudent dividend policies. In particular, the Statement emphasizes that cash dividends should not be paid if they are inconsistent with an organization’s capital position or could weaken its overall financial health or impair its ability to meet the needs of creditworthy borrowers. The Statement indicates that supervisory staff will continue to review banking organization dividend policies and take action where such policies are deemed inconsistent with sound capital and lending policies.
- The Statement stresses the Agencies’ expectation that banking organizations work with existing borrowers to avoid preventable foreclosures and mitigate other potential mortgage-related losses. Banking organizations are directed to ensure that their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while implementing risk-mitigation measures. Lenders and servicers are urged to adopt systematic, proactive and streamlined mortgage loan modification protocols and to review troubled loans using the protocols. The Statement further indicates that lenders and servicers should determine whether a loan modification would enhance the net present value of the loan before proceeding to foreclosure and ensure that loans currently in foreclosure have been subjected to such analysis. The Statement notes that supervisors “will fully support banking organizations as they work to implement effective and sound loan modification programs.” Banking organizations that experience challenges in implementing loss mitigation efforts or in making new loans to borrowers are instructed to work with their primary supervisors to address specific situations.
- The Statement stresses that poorly-designed management compensation policies can create perverse incentives that can ultimately jeopardize the health of a banking organization. The Statement indicates that compensation policies should be aligned with the organization’s long-term prudential interests, provide appropriate incentives for safe and sound behavior and structure compensation to prevent short-term payments for transactions with long-term horizons. Further, the Statement notes the importance of banking organizations having independent risk management and control functions. The Statement reflects the view that banking organizations should regularly review their management compensation policies to ensure consistency with the longer-run objectives of the organization and sound lending and risk management practices.