The federal government, agencies, and financial institutions (FIs) have been working diligently to mitigate the impact of the coronavirus on businesses and individuals. Last month, federal and state banking regulators eased pressure on coronavirus loan workouts, urging financial institutions to work with their borrowers and members affected by COVID-19, and agreeing that these FIs would not be required to categorize loan modifications made in good faith in response to COVID-19 as troubled debt restructurings (TDRs).
There has been an influx of calls from consumers who can no longer pay their loans, and this will quickly follow suit on the commercial lending side. Small businesses – even large corporations – are feeling the financial crunch from the coronavirus. While some borrowers will be able to catch up or refinance in market-available terms, others will need significant intervention from lenders, including the designation of loans as TDRs, when borrower hardship persists past the acute phase of the pandemic or energy shocks. So, what can a financial institution do with loans that have been impacted by the fallout from the coronavirus? What options do lenders have to work with borrowers, without causing additional regulatory scrutiny? Financial institutions across the country should establish effective plans for managing loan workouts.