FFIEC, on behalf of its members that include US Agencies such as CFPB, FDIC, FED, NCUA, and OCC, issued a joint statement that sets out prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers. This joint statement has been issued just as loans near the end of the initial loan accommodation periods provided during the COVID-19 event. These principles are consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness and are generally applicable to both commercial and retail loan accommodations. The statement also addresses issues relevant to accounting, regulatory reporting, and internal control systems of the supervised financial institutions.
FFIEC and its member US agencies encourage financial institutions to consider prudent accommodation options that can ease cash flow pressures on affected borrowers, improve their capacity to service debt, and facilitate institutions’ ability to collect loans, in line with the applicable laws and regulations. Such arrangements may mitigate the long-term impact of a financial challenge on borrowers by helping to avoid delinquencies or other adverse consequences. Effective risk management includes providing clear, conspicuous, and accurate communications and disclosures to inform borrowers of affordable and sustainable accommodation options prior to the end of the accommodation period. Sound credit risk management includes applying appropriate loan risk ratings or grades and making appropriate accrual status decisions on loans affected by the COVID event. 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.
Financial institutions must follow applicable accounting and regulatory reporting requirements for all loan modifications, including additional modifications for borrowers that may continue to experience financial hardship at the end of the initial accommodation period. This includes maintenance of appropriate allowances for loan and lease losses (ALLL) or allowances for credit losses (ACL), as applicable. In accordance with the U.S. generally accepted accounting principles (GAAP) and regulatory reporting instructions, management should consider the effects of external events, such as the COVID-19 event, in its allowance estimation processes. Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings, for a limited period, to account for the effects of the COVID-19 event.
Internal controls for initial and additional accommodation periods include quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions that are commensurate with the size, complexity, and risk of the activities of a financial institution. These internal control functions typically include appropriate targeted testing of the process for managing each stage of the accommodation. Prudent testing by internal control functions typically confirm that accommodation terms are extended with appropriate approval; and risk rating assessments are timely and appropriately supported. It also confirms that 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.
Keywords: Americas, US, Banking, COVID-19, Credit Risk, CARES Act, Reporting, US GAAP, IFRS 9, ALLL, Loan Moratorium, Payment Deferrals, US Agencies
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