Letter to Credit Unions 20-CU-13 Working with Borrowers Affected by the COVID-19 Pandemic
On April 7, 2020, federal regulators issued a revised interagency statement on loan modifications and reporting related to COVID-19 and the CARES Act. NCUA issued LTCU 20-CU-13 to provide guidance for credit union working with borrowers experiencing financial hardship as a result of the COVID-19 pandemic.
Noting that credit unions need to consider appropriate strategies for each member and whether members need new funds or modifications of existing loans, NCUA emphasizes credit union must also continue operate in a safe and sound manner. NCUA’s guidance discusses several options for working with distressed members:
New Funds to Borrowers
- Emergency Small-Dollar, Unsecured Loans – Intended to provide rapid shot term cash flow. Typically. $5k or less, 90-dya grace period and 2-3 year maturities.
- SBA’s Paycheck Protection Program and Economic Injury Disaster Loan – Special programs offered with 100% SBA guaranteed and eligible for forgiveness of entire loan.
- Payday Alternative Loans (PALs) I and II– NCUA PALS I and II small dollar loan programs with maximum loans of $1K or 2K respectively and 6-12 month maturities. See § 701.21(c)(7).
- Increased Revolving Credit Limits – Increasing credit lines for credit cards, home equity lines, and other revolving credit products.
- Temporary Loan Modifications
- Credit unions should comply with federal & state consumer financial protection rules, including fair lending laws, and provide accurate disclosures for all loan modifications. NCUA notes the following:
- CARES Act Forbearance – Provides forbearance for federally backed transactions for 180 days (with an option for an additional 180 days) with no additional fees, penalties, or interest beyond contractual payments. The law also provides for a moratorium on foreclosures of these loans.
- Payment Forbearance – A credit union may allow a borrower to defer monthly payments, w/an agreement to repay missed principal & interest at a later date.
- Waiving Late Payment or Modification Fees – Waiving fees can prevent additional increases to a borrower’s debt as fees are often added to loan balances.
- Interest-only Payments – This strategy results in lower payments for a defined period while preventing negative amortization. However, borrower’s payment would increase after the interest-only period.
- Reducing the Interest Rate – Provide temporary relief by reducing the interest for a defined period.
NCUA reminds credit unions to consider the borrower’s ability to repay the debt at the end of the temporary modification period, especially if the modification will result in higher payments or a balloon payment.
- Permanent Loan Modifications
- NCUA notes the following strategies for permanently modifying or refinancing existing loans:
- Consolidating Loans– Combining multiple loans, especially with an improved interest rate or extended amortization, could lower payments for a borrower.
- Extending the Maturity Date– While this strategy can lower payments for a borrower, credit unions should consider whether the value of any collateral would remain sufficient through the extended term.
- Reducing the Interest Rate – Reducing the interest rate can provide relief to a borrower by lowering their payment without extending the loan term.
- Forgiving Principal – This would cause a loss to the credit unions and should generally be a last-resort concession, typically used only in cases where a borrower has negative equity in the property and a financial impact analysis indicates this modification appears favorable over foreclosure action.
- Restructuring into A-B Notes – Generally only used when analysis indicates foreclosure is not a better option for the credit union, credit unions can structure an “A” note with a loan amount that meets a borrower’s ability to repay the loan and a B note to be repaid when A note repayment is completed.
- Monitor and Report Loan Modifications
- Credit union policies should:
- 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
- comply with regulatory reporting requirements
The metric for successful modifications is the performance of the loan after it has been modified. Losses should be promptly recognized. The program should include periodic reports to executives and directors on all modified loans. The periodic reports may include:
- delinquencies and charge-offs
- number & 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.
Credit unions seeking additional information should reference the following sources:
- NCUA Letter to Credit Unions 20-CU-02, NCUA Actions Related to COVID-19
- NCUA Letter to Credit Unions 20-CU-06, Small Business Administration Loan Programs to Help Small Businesses and Members During the COVID-19 Pandemic
- NCUA Letter to Credit Unions, 10-CU-07, Commercial Loan Workouts
- NCUA Regulatory Alert 10-RA-13, Final Rule – Part 701, Short-term, Small Amount Loans
- NCUA Letter to Credit Unions, 09-CU-19, Evaluating Residential Real Estate Mortgage Loan Modification Programs
- NCUA Supervisory Letter 13-02, Examiner Review of Loan Workouts, Nonaccrual, and Regulatory Reporting of Troubled Debt Restructured Loans and NCUA Letter to Credit Unions, 13-CU-03, Supervisory Guidance on Troubled Debt Restructuring
- NCUA Letter to Credit Unions, 08-CU-20, Evaluating Current Risks to Credit Unions and the attached Supervisory Letter, Evaluating Current Risks to Credit Unions
- CFPB Guide to Coronavirus Mortgage Relief Options