FFIEC Releases Joint Statement on Additional Loan Accommodations Related to COVID-19

The statement provides prudent practices for credit unions to work with borrowers in a safe and sound manner as loans near the end of accommodation periods.

8/11/2020

The Federal Financial Institutions Examination Council (FFIEC) recently released a joint statement to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans approach the end of initial loan accommodation periods.

COVID-19 has had a significant adverse impact on some credit union members, but many credit unions have worked prudently with their members who are or may have been unable to meet their contractual payment obligations due to the pandemic. While some borrowers have been able to resume contractual payments at the end of an accommodation, others may still be unable to meet their obligations due to continuing financial challenges. Credit unions may face difficulties in assessing credit risk due to limited access to borrower financial data, COVID-19 event-induced covenant breaches, and difficulty in analyzing the impact of COVID-19 event-related government assistance programs.

The FFIEC members encourage financial institutions to consider prudent accommodation options that are based on an understanding of the credit risk of the borrower; are consistent with applicable laws and regulations; and, that can ease cash flow pressures on affected borrowers, improve their capacity to service debt, and facilitate a financial institution’s ability to collect on its loans.

The joint statement provides prudent practices for credit unions to work with borrowers in a safe and sound manner as loans near the end of accommodation periods.

Prudent risk management practices include identifying, measuring, and monitoring the credit risks of loans that receive accommodations. Monitoring and assessing loan accommodations on an ongoing basis typically enables credit unions to recognize deterioration and potential loss exposure in a timely manner. Sound credit risk management includes applying appropriate loan risk ratings or grades and making appropriate accrual status decisions on loans affected by COVID-19. Effective management information systems and reporting helps to ensure that management understands the scope of loans that received an accommodation, the types of initial and any additional accommodations provided, when the accommodation periods end, and the credit risk of potential higher-risk segment of the portfolio(s).

For a borrower that continues to experience financial challenges after an initial accommodation, it may be prudent for the financial institution to consider additional accommodation options to mitigate losses for the borrower and the financial institution. Well-designed and consistently applied accommodation options accompanied by prudent risk management practices can minimize losses to the financial institution, while helping its borrowers resume structured, affordable, and sustainable repayment of amounts contractually due over a reasonable period of time.

Effective approaches to risk management generally include the following:

  • Providing additional accommodation options to borrowers that are affordable and sustainable;
  • Providing clear, conspicuous, and accurate communications and disclosures to inform the borrowers of the available options;
  • Providing such communications and disclosures in a timely manner, before the end of the accommodation period to allow adequate time for the borrower and financial institution to consider next steps, which may include payment deferral, loan modification, or loan extension, among other options;
  • Basing eligibility and payment terms on consistent analyses of borrowers’ (and, if applicable, guarantors’) financial condition and reasonable capacity to repay;
  • Ensuring policies and procedures reflect accommodation options offered by the financial institution and promote consistency with applicable laws and regulations, including fair lending laws;
  • Providing appropriate training to employees and other persons responsible for compliance and operational procedures related to any additional accommodation options, including customer service personnel;
  • Ensuring that risk monitoring, audit, and consumer complaint systems are adequate to evaluate compliance with applicable laws, regulations, policies, and procedures; and
  • Providing complete and accurate information to borrowers and subsequent servicers during loan transfers and ensuring post-transfer servicing is consistent with the agreement with the borrower and the borrower’s status at the time of transfer.

Prudent testing by internal control functions typically confirm the following:

  • Accommodation terms are extended with appropriate approval;
  • Additional accommodation options offered to borrowers are presented and processed in a fair and consistent manner and comply with applicable laws and regulations, including fair lending laws;
  • Servicing systems accurately consolidate balances, calculate required payments, and process billing statements for the full range of potential repayment terms that exist once the accommodation periods end;
  • Staff, including problem loan and collections personnel are qualified and can efficiently handle expected workloads;
  • Borrower and guarantor communications, and legal documentation, are clear, accurate, and timely, and in accordance with contractual terms, policy guidelines, and federal and state laws and regulatory requirements; and
  • Risk rating assessments are timely and appropriately supported.
Question of the Week

Q. We repossessed a vehicle, and in it we found an envelope of money. We have notified the debtor in the legally required manner, but the debtor has claimed neither the money nor the car. Can we use the found money for offset or deposit the money into the member’s account?

A. No. The credit union does not have a security interest in the money, so offset would not be a good idea. Further, the credit union does not know that the money belongs to the member so it should not be put in their account. Credit unions should review the loan agreement for provisions concerning personal property left in repossessed vehicles, as the agreement may lay out how such property will be handled.

One option would be to keep the money in a separate account at the credit union. If the debtor does not claim the money within the required time, the credit union would probably be safe in taking it.

Treatment of found property, where the owner is unknown: 

The policy on lost and found property in Washington states that the owner has 60 days after the find was appropriately reported by the finder to the county clerk to establish their right to possession. Reports must be filed when money or goods valued at $250 or more are found. Failure to comply with the lost and found procedure is forfeiture to the right of the property. The finder is made liable for the full value of the property to the owner. So, if the credit union fails to properly notify the debtor or appropriate officer or takes the money before 60 days has passed, it could be liable for the full value of the property to the owner. 

In Oregon, the owner has three months after the find was appropriately reported to the county clerk to establish their right to possession.

In Idaho, the finder has 10 days to report money or goods valued at $100 or more to the county clerk. There is also a requirement for the finder to publish a notice. The owner then has three months to reclaim the property.

Related Links

RCW 63.21.020
RCW 63.21.040
ORS 98.005
ORS 98.025
IDS 55-405

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