Financial institutions now have greater ability to accommodate and provide support to borrowers affected by COVID-19, thanks to an Interagency Statement released Sunday evening, March 22, 2020. This guidance provides much-needed perspective regarding short-term loan modification programs that institutions are exploring to help members in this time of distress.
Impact on Lenders
This Interagency Statement addresses the accounting rules related to loan modifications for all financial institutions regardless of asset size. Previously, if a bank or credit union modified a loan, it triggered potential outcomes and generated questions during an audit related to classification as a troubled debt restricting (TDR). Now, those rules are relaxed, so long as the borrower was in good standing and did not need this type of assistance before the COVID-19 crisis started.
Action Items: Financial Institutions
Banks and credit unions should take this opportunity to move forward with identifying the help and support borrowers need right now, with lessened fear of audit repercussions. Here’s how to get started:
- Discuss and develop potential loan modification protocols (and contact RKL’s Financial Services Industry Group for support and assistance)
- Update lending teams and underwriters and prepare them to handle the volume of requests that may come in
- Work proactively with borrowers
- Promote new loan modification options available to members and customers
Impact and Action Items for Borrowers
One lasting impact of the 2008 financial crisis is a subtle hesitancy on the part of businesses to reach out to their financial institutions when they need help. Business owners and executives need to know that with this Interagency Statement, banking regulators have proactively addressed concerns that may have complicated things in the past. Now is the time to remain in close contact with your bank or credit union and express any liquidity challenges that may arise during these tough times.
With the Interagency Guidance, financial institutions now have a clearer view of how to help borrowers. Small businesses and their employees should reach out to their financial institutions to discuss specific needs, whether that is a line of credit for additional funds, skip-a-payment or temporary deferral of fixed payments.
Please reach out to RKL’s Financial Services Industry Group via the contact form below with any questions about this Interagency Statement or support implementing these action items.