United States: Lenders Encouraged To Work With Customers In Response To COVID-19 Challenges

The Federal Deposit Insurance Corporation (the "FDIC") issued updated statements on March 19, 2020 and March 22, 2020, supplementing their earlier 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 FDIC statements and other information about the impact of COVID-19 on banking regulations 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 return, 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.

Updated FDIC Guidance (March 19, 2020)

The FDIC advised financial institutions to address any deferred or skipped payments by either extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. Banks that provide accommodations to borrowers affected by COVID-19 should maintain appropriate documentation that considers borrowers' payment status prior to being affected by COVID-19 and payment performance according to the terms of such payment accommodations, and banks should also consider documenting borrowers' recovery plans, sources of repayment, additional advances on existing or new loans and value of collateral. Accounting Standards Code 310-40 provides guidance on determining whether a loan with renegotiated terms should be accounted for as a troubled debt restructuring and Accounting Standards Code 310-10-35 provides guidance on accounting for impairment losses on troubled debt restructurings. A loan deferred, extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk does not constitute a troubled debt restructuring.

Updated FDIC Guidance (March 22, 2020)

The FDIC, together with the Board of Governors of the Federal Reserve System, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and certain state banking regulators (collectively, the "Agencies"), issued a supplemental statement on March 22, 2020. The Agencies confirmed that they will not "criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices... [or] institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan". The Agencies noted that they have confirmed with the Financial Accounting Standards Board that "short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief" (including "short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays in payment that are insignificant") do not constitute troubled debt restructurings. The Agencies also noted that "[b]orrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented" and that lenders may "presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purpose of determining [troubled debt restructuring] status".

Codification in CARES Act (March 25, 2020)

On March 25, 2020, the Senate passed an amendment to H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (as amended, the "CARES Act"), which will soon be considered in the House. The CARES Act codifies certain agency guidance summarized above.

A summary of the relevant CARES Act provisions can be found here.

The complete text of the CARES Act can be found here.

As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules. This is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand. This summary does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to COVID-19, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay and other issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.