Written by Jasir Jawaid and Tim Weatherhead
The Federal Financial Institutions Examination Council outlined risk management and consumer protection principles that it says financial institutions should adhere to while working with affected borrowers as COVID-19-related loans near the end of initial accommodation periods.
The FFIEC, an interagency body comprised of five federal banking regulators, said monitoring and assessing loan accommodations on an ongoing basis allows a financial institution to timely detect any deterioration, including potential loss exposure. When executing an accommodation, financial institutions must provide "clear, accurate, and timely" information to borrowers and guarantors, the FFIEC said.
The council also noted the importance of well-structured and sustainable accommodation, noting that they are more effective when they are based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower. The coronavirus pandemic may result in a negative long-term impact on a borrower's future earnings, so management may need to rely more heavily on projected financial information for commercial and retail borrowers when making underwriting decisions, it said.
In order to avoid delinquencies, the FFIEC recommended that financial institutions provide consumers with options for repaying missed payments at the end of their accommodations. In addition, the council encouraged financial institutions to provide consumers with options for making changes to the terms of their respective credit products to support sustainable payments over the long term.
It also said financial institutions must follow applicable accounting and regulatory reporting requirements for all loan modifications. In accordance with GAAP and regulatory reporting guidance, management should weigh the effect of the pandemic in its allowance for loan and lease loss or allowance for credit loss estimation processes.
Finally, the FFIEC said that quality assurance, credit risk review, operational risk management, compliance risk management and internal audit functions commensurate with the size, complexity and risk of the financial institution's activities are critical elements of prudent risk management at the end of the initial accommodation periods.
This article was published by S&P Global Market Intelligence on the S&P Capital IQ Pro platform.
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