NCUA Lists Strategies for Working with Borrowers Affected by COVID-19
May 5, 2020
The National Credit Union Administration (NCUA) released letter to credit unions 20-CU-13 to describe various strategies credit unions can use to work with borrowers who experience financial hardship due to COVID-19, including providing additional funding to making temporary or permanent loan modifications. The letter to credit unions also describes how credit unions should monitor and report loan modifications.
The NCUA encourages credit unions to work with impacted borrowers. NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight.
Strategies to provide new funds to borrowers negatively impacted by the COVID-19 pandemic include, but are not limited to:
- Emergency small-dollar, unsecured loans;
- Small Business Administration Paycheck Protection Program loans or the EIDL program;
- Payday alternative loans (PAL); and
- Increased revolving credit limits.
Strategies to temporarily modify existing loans include, but are not limited to:
- CARES Act forbearance;
- Payment forbearance;
- Waiving of fees for modifications or late payments;
- Interest-only payments; and
- Reduced interest rates.
Strategies to permanently modify or refinance an existing loan include, but are not limited to:
- Consolidating loans;
- Extending the maturity date;
- Reducing the interest rate;
- Forgiving principal; and
- Restructuring into A-B notes.
Credit union policies should address the use of loan workout strategies and outline risk management practices. Policies should clearly define borrower eligibility requirements, set aggregate program limits, and establish sound controls to ensure loan workout actions are structured properly. A credit union’s risk-monitoring practices for modified loans should:
- Be commensurate with the level of complexity and nature of its lending activities;
- Maintain safe and sound lending practices; and
- Comply with regulatory reporting requirements.
Success is measured by the performance of a loan after it has been modified. Effective credit risk-monitoring practices should include periodic reports to the CEO and the board of directors on all modified loans, support a successful collection process, and ensure the prompt recognition of loan losses. A credit union’s monitoring practices may include reports of the following:
- Number and volume of modifications, by loan type
- First payment defaults
- High loan-to-value and debt-to-income ratios
- Credit quality
- Number of times each loan has been modified
- Expected loss exposure
Credit union management must comply with regulatory reporting requirements and generally accepted accounting principles, as applicable. A credit union’s decisions related to loan modifications may affect regulatory reporting, including interest accruals, troubled debt restructurings (TDRs), and credit loss estimates.
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The NCUA issued letter to credit unions 20-CU-13, which describes various strategies credit unions can use to work with borrowers who experience financial hardship because of the COVID-19 emergency. These range from offering additional funding to making temporary or permanent loan modifications. It also describes how credit unions should monitor and report loan modifications.
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