By now it is fairly evident that the Coronavirus (COVID-19) Pandemic is having adverse effects on practically all businesses, large and small. This situation presents an immediate issue for those businesses and their lenders in terms of cash flow for servicing loan debt, complying with ratios and covenants established in loan documents, and decreasing collateral value in some instances. Many of these borrowers have been long standing, good customers and will likely return to such after the pandemic has passed. For the time being, however, a borrower adversely affected by the coronavirus is faced with a likely default with its lender, and the lender is faced with having to address the default situation of the borrower, including its regulatory obligations relating to identifying and reporting non-performing loans.
On March 6, 2020, the FDIC began issuing interagency statements regarding pandemic planning. Since then, it has published a number of public press releases, letters and other information on its Coronavirus (COVID-19) web page where bankers can find information about working with affected customers, lending activities, supervisory relief, and regulatory reporting requirements during the pandemic.
The FDIC is working with federal and state banking agencies, as well as financial institutions, to consider all reasonable steps to assist customers in communities affected by COVID-19. A brief summary of the FDIC’s suggestions on various topics for banks and financial institutions can be found in its Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance.
In short, the FDIC “encourages financial institutions to work with all borrowers, especially borrowers from industry sectors particularly vulnerable to the volatility in the current economic environment, such as, but not limited to, airlines; energy companies; travel, tourism, and shipping industries; and small businesses and independent contractors that are reliant on affected industries.” The Statement sets forth a non-exhaustive list of suggestions regarding efforts banks and lenders may take with affected customers such as, among other things, waiving certain fees (e.g., late fees, ATM fees, overdraft fees, etc.), increasing credit card limits for creditworthy customers, working with customers who are temporarily unable to work due to temporary business closures and sickness, and modifying or restructuring debt obligations. The FDIC acknowledges that there may be many other forms of relief offered to customers and it “supports and will not criticize efforts to accommodate customers in a safe and sound manner.” Actions taken by financial institutions during these times, however, should be prudent and in the best interest of the financial institutions, the borrower and the economy.
In a related Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19), the FDIC has provided more specific guidance:
- The FDIC encourages financial institutions to provide payment accommodations to borrowers, which may include extension of the maturity date or having late payments due later as a balloon payment. However, the FDIC cautions that lenders are expected to comply with any federal or state consumer laws relating to disclosures that may be required and any resolutions should be targeted toward repayment of the loan.
- Borrowers who were current prior to becoming affected by COVID-19 and then receive payment accommodations as a result of the effects of COVID-19 generally would not be reported as past due.
- Financial institutions should maintain appropriate documentation that considers borrowers’ payment status prior to being affected by COVID-19, and borrowers’ payment performance according to the changes in terms provided by the payment accommodation. Documentation could also include the borrowers’ recovery plans, sources of repayment, additional advances on existing or new loans, and value of the collateral
- Financial institutions should determine whether loans with payment accommodations made to borrowers affected by COVID-19 should separately be reported as Trouble Debt Restructure (“TDR”) in separate memoranda items for such loans in regulatory reports. Financial institutions may refer to Financial Accounting Standards Board (FASB) Statement No. 15 for additional guidance on determining whether a loan with renegotiated terms should be accounted for as a TDR. FASB Statement No. 114 also provides guidance on accounting for impairment losses on TDRs.
- Each financial institution should refer to the applicable regulatory reporting instructions, as well as its internal accounting policies, in determining whether to report loans with accommodations to customers affected by COVID-19 as nonaccrual assets in regulatory reports. (See also the response to question 3.)
It is worth noting from phrases used in the above referenced memo, that, notwithstanding the FDIC’s stated desire that financial institutions work with borrowers, the FDIC expects lenders to provide assistance “in a prudent manner,” “determine appropriate reporting treatment,” “maintain appropriate documentation” and “preserve the integrity of their internal loan grading methodology and maintain appropriate accrual status on affected credits.”
Although banks and financial institutions are encouraged to work with affected borrowers to manage and mitigate the adverse effect of the pandemic and may feel like they have no choice in some circumstances, there will inevitably be unique and novel scenarios that arise as they navigate these unchartered waters. As stated above, actions taken by financial institutions during these times should be reasonable, prudent and consistent with safe and sound lending practices. When in doubt, regulated institutions are encouraged to call their FDIC Regional Office to discuss key considerations and regulations on payment accommodations and disclosures.