Financial institutions must navigate a maze of statutory and regulatory requirements in order to offer relief to consumers impacted by the COVID-19 national health crisis. Providing loan forbearances and modifications as state and federal agencies have been encouraging often has collateral consequences for the institution. To mitigate such roadblocks, federal agencies continue to take steps to clear the way for financial institutions to assist consumers. We have previously written on agency guidance on CARES Act mortgage forbearances and regulatory compliance, but secondary market salability and regulatory reporting – as well as the need to consider consumer protection issues at each step of the process – also form important parts of the puzzle facing financial institutions.
FHFA Adds Temporary Flexibility in Loan Sales
According to its recent press release, the FHFA has announced that it will allow the GSEs to purchase certain single-family mortgages in forbearance. Typically, a forbearance would make a loan ineligible for delivery to the GSEs – but given the short period of time that passes between origination and delivery to the GSEs, pre-delivery forbearances are typically unusual so early in the life of a mortgage loan. The FHFA notes that the national health crisis is resulting in an uptick of new borrowers seeking a forbearance shortly after closing, before the loan can be delivered to the GSEs.
Although only certain loans will be eligible for purchase, and will "be priced to mitigate the heightened risk of loss," the added flexibility will help to ensure that mortgage lenders can continue extending credit during the national health crisis by providing liquidity and reducing the risk that extending credit to borrowers who may find themselves in need of a forbearance shortly after origination will prevent sale of those loans to secondary market purchasers.
Financial Regulators Encourage Prudent Loan Modifications
The FRB, FDIC, NCUA, OCC, and CFPB, as well as the Conference of State Bank Supervisors (together, Agencies), issued a revised Interagency Statement (Revised Statement) on April 7, superseding the Agencies' March 22 statement, that encourages financial institutions to work "prudently" with borrowers who are struggling to meet their payment obligations because of COVID-19 The Revised Statement provides additional information regarding loan modifications and clarifies the interaction between the now Revised Statement and the related relief pursuant to Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Revised Statement sends a clear message that the Agencies consider prudent loan modifications for borrowers affected by COVID-19 to be positive actions that can manage or mitigate adverse impacts and, in the longer term, improve loan performance and reduced credit risk. The Revised Statement eases reporting concerns associated with COVID-19 forbearance and loan modifications, and reminds financial institutions that loans restructured as described under the Revised Statement will continue to be eligible as collateral at the Federal Reserve's discount window.
The Agencies emphasized that they will not direct supervised financial institutions to automatically categorize all COVID-19-related loan modifications as troubled debt restructurings (TDRs). Financial institutions will have "broad discretion" to implement prudent loan modification programs that are consistent with the Revised Statement's framework.
The Revised Statement cites confirmation by the Financial Account Standards Board that short-term modifications made in good faith in response to COVID-19 for borrowers who were current (i.e., less than 30 days past due) prior to any relief do not constitute TDRs. This determination includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. Specifically, for the purposes of determining TDR status, financial institutions are permitted to presume that borrowers are not experiencing financial difficulties at the time of the modification. Thus, there is no need for further TDR analysis for each loan modification with these characteristics.
In addition to clarifying the circumstances under which a financial institution would not need to account for a loan modification as a TDR, the Revised Statement provides accounting and reporting guidance for COVID-19-related modifications:
- Credit Risk Allowances: Examiners will exercise judgment in reviewing loan modifications and will not automatically adversely risk rate credits that are affected by COVID-19. The Agencies will not criticize financial institutions for their efforts to mitigate adverse effects, as long as the practices are consistent with safe and sound banking practices.
- Mortgage Loans and Regulatory Capital: The Agencies will not consider one-to-four-family residential mortgages to be restructured or modified for the purposes of their respective risk-based capital rules, as long as they are prudently underwritten and not 90 days past due or carried in nonaccrual status.
- Past Due Reporting: For loans not otherwise reportable as past due, the Agencies do not expect financial institutions to designate as past due any loans with COVID-19-related deferrals because the financial institution's agreement to the deferral means that the payments are not contractually past due.
- Nonaccrual Status and Charge-offs: Financial institutions should refer to the applicable regulatory reporting instructions and their own internal accounting policies to determine if loans to stressed borrowers should be reported as nonaccrual assets and charge-offs in regulatory reports.
Consumer Protection and Fair Lending Remain Important Considerations
The Revised Statement reminds financial institutions that "[w]hen working with borrowers, lenders and servicers should adhere to consumer protection requirements," and particularly notes fair lending laws. The Agencies also indicate that states and the federal government may enact laws, issue regulations, or publish guidance that result in additional consumer protections for borrowers. Financial institutions may be well served in heeding the Agencies' warning and closely monitoring the systems and personnel engaged in assisting and offering relief to consumers affected by the COVID-19 pandemic.
While institutions must continue to comply with consumer protection and fair lending laws, the Revised Statement highlights that the "unique circumstances impacting borrowers and institutions" and "good-faith efforts demonstrably designed to support consumers and comply with consumer protection laws" will be taken into account in supervision and enforcement. According to the Revised Statement, the Agencies are more interested in correcting problems and ensuring consumer remediation than in punishing financial institutions for minor regulatory violations that may occur despite a sound compliance management system and good faith efforts to comply with the law.
While nonspecific, the Revised Statement notes that the Agencies do not "expect" to engage in a consumer protection-related public enforcement action against an institution, provided that the circumstances giving rise to the consumer compliance issue were "related to the National Emergency" and the financial institution "made good faith efforts to support borrowers and comply with the consumer protection requirements, as well as responded to any needed corrective action." Financial institutions can infer that the Agencies, when reviewing an institution's COVID-19 crisis responses, will be focusing on activity resulting in consumer harm, even inadvertent harm, that may arise from insufficient compliance controls.