Lenders Encouraged to Work with Customers in Response to COVID-19 Challenges
The Federal Deposit Insurance Corporation (the “FDIC”) issued a statement on March 13, 2020, encouraging financial institutions to take prudent steps to assist customers and communities affected by the Coronavirus Disease 2019 (“COVID-19”).
The official announcement can be found here.
Working With Customers
Acknowledging that the unique and evolving situation surrounding COVID-19 could pose significant business disruptions and challenges, the FDIC emphasized that efforts such as waiving certain late payment fees, offering payment accommodations for borrowers to defer or skip some payments, increasing credit limits for certain borrowers and extending payment due dates would serve the long-term interests of communities and the financial system. Financial institutions are encouraged to work with all borrowers, particularly those from industry sectors that are vulnerable to the volatility of this economic climate and small businesses and independent contractors that are reliant on affected industries. In exchange, the FDIC wrote that it would “work with affected financial institutions to reduce burden when scheduling examinations, including making greater use of off-site reviews, consistent with applicable legal and regulatory requirements” and that the agency would not assess penalties or take other supervisory action against regulated institutions that cannot fully satisfy reporting requirements due to the impact of COVID-19.
“Significant Flexibility” in Classifying Credits
The FDIC assured banks that their “prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism” but noted that banks must evaluate whether changes to certain loans experiencing COVID-19-related stress qualify as troubled debt restructurings. Citing accounting standards, the FDIC elaborated, “a modification constitutes a [troubled debt restructuring] only if the institution grants a concession to the borrower which it would not otherwise grant because a borrower is experiencing financial difficulties”. The FDIC did clarify that although designation as a troubled debt restructuring “means a modified loan is impaired for accounting purposes, it does not automatically result in an adverse classification”, noting that many modified loans designated as troubled debt restructurings for accounting purposes are “fully performing and collectible credits” and that FDIC examiners would exercise “significant flexibility” in classifying credits impacted by COVID-19.