On May 14, The Wall Street Journal ran a front-page article titled “Strapped Borrowers Inundate Lenders,” which discussed the efforts of banks to provide relief to consumer borrowers during the COVID-19 crisis. The article noted that “[m]illions of people in the U.S. have asked for a break on their debt payment to weather the coronavirus shutdown,” and their “lenders are having a hard time keeping up.” The subject of providing loan relief to consumers who are struggling to make payments due to shutdown-induced economic hardship has also been the focus of public statements issued by the FDIC and the OCC. Neither of those agencies, however, has given any indication that safety and soundness requirements for providing relief to struggling borrowers are likely to be relaxed. It is therefore important for banks, as well as nonbank lenders that adhere to bank forbearance rules, to be aware of what those expectations include.
Both the OCC and the FDIC have encouraged banks to consider allowing consumers who are affected by the ongoing economic shutdown to skip or defer loan payments.1 Historically, the OCC has advised that offering a “skip-a-pay” account feature should be limited to only the “most creditworthy customers.”2 Moreover, even for those customers, the practice is discouraged because it can “lengthen the repayment term and impair risk analyses that rely on regular payment streams.”3 Furthermore, while the collections practice of allowing a borrower who is experiencing temporary economic difficulties to skip making a loan payment is allowed, the practice is subject to the requirements of the Federal Financial Institutions Examination Council Uniform Retail Credit Classification and Account Management Policy (FFIEC Policy).4 This policy provides that the re-aging of open-end accounts5 and extensions, deferrals, renewals and rewrites of closed-end loans may be used to help borrowers overcome temporary financial difficulties when those practices are based on the borrower’s “renewed willingness and ability to repay the loan,” and provided they are “structured and controlled in accordance with sound internal policies.”
The FFIEC Policy also narrows the ability of a bank to toll or slowdown aging an account when a borrower pays some amount on its loan, but less than a full contractual payment. In those instances, the bank has just two options: (1) a payment equivalent to 90 percent or more of the contractual payment may be treated as a full payment or (2) the bank may aggregate partial payments to equal a full payment. Under the second option, if a regular installment payment is $300 and the borrower makes payments of only $150 per month for a six-month period, the loan would be $900 or three full months past due.
The FFIEC Policy’s requirements are ultimately reflected in the assets listed on the bank’s Call Report of Financial Condition. As a result, in addition to the risk of agency enforcement action for failure to adhere to the FFIEC Policy itself, a bank engaging in improper account aging practices risks significant monetary penalties for call report inaccuracies, which are assessed on a daily basis as long as the subject inaccuracies persist. Failures to comply with the FFIEC Policy can also trigger violations of the federal securities laws. For example, in March 2003, the SEC issued a cease and desist order against Household International, Inc., ordering that firm to cease engaging in the overly permissive re-aging of consumer credit card accounts, which, in turn, resulted in shareholder lawsuits.
All of the recently issued FDIC guidance regarding COVID-19 related payment accommodations stresses the need for satisfying safety and soundness expectations. For example, FIL-17-2020 provides that, “The FDIC recognizes that efforts to work with customers and communities affected by COVID-19 can be consistent with safe and sound banking practices and in the public interest.” In addition, its FAQs concerning working with borrowers affected by COVID-19 stresses that all such efforts “should be ultimately targeted toward loan repayment.” Finally, its “Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance” states that the FDIC “will not criticize efforts to accommodate customers in a safe and sound manner.”6
Key Points
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Banks offering COVID-19 related payment accommodations should be careful to document all of their actions and, consistent with the FFIEC Policy, should refrain from offering temporary relief to borrowers for whom a permanent, fully liquidating workout program would be more appropriate (e.g., borrowers who are unemployed as opposed to furloughed and are unlikely to recover the ability to satisfy their original loan terms in the foreseeable future).
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The OCC and the FDIC have stated that prudent efforts by banks to modify the terms of existing loans will not be subject to examiner criticism. These statements should not be misinterpreted as an invitation to circumvent requirements and supervisory expectations relating to safety and soundness. The goals of safety and soundness are to ensure the financial integrity of banks and to protect the Federal Deposit Insurance Fund against losses resulting from bank failures. Even in these extraordinary times, it is exceedingly unlikely that these requirements and expectations would be materially relaxed.
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Unrelated to safety and soundness, the FDIC’s FAQs regarding payment accommodations state that, “When deferring or skipping payments, providing borrowers with accurate disclosures that are consistent with federal and state consumer protection laws will help to avoid any misunderstandings relative to the changes in the terms.”
Endnotes
1 OCC Bulletin 2020-15; FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance.
2 Comptroller’s Handbook – Installment Lending, at 158.
3 Comptroller’s Handbook – Credit Card Lending, at 32; see also FDIC Consumer Compliance Highlights June 2019.
4 Comptroller’s Handbook – Credit Card Lending, at 94.
5 Re-aging occurs when a delinquent account is returned to current status based on the borrower’s demonstrated renewed willingness and ability to repay, but without fully satisfying the conditions of the loan agreement. The FFIEC Policy sets forth minimum expectations for repayment programs that may result in re-age.
6 OCC Bulletin 2020-15 similarly provides that “prudent efforts to modify the terms on existing loans for affected customers should not be subject to examiner criticism.”
