Managing Loan Workouts: 10 Lender Action Items

Financial institutions have many decisions to make about how to select loans for modifications, how to modify them, and how to track them, according to Camp and Garver Moore, who is also Managing Director of Advisory Services at Abrigo. Camp and Moore outlined several action items for managing loan workouts during a recent webinar. Among their suggestions:

1. Determine who is accountable. Even if the bank or credit union is managing the loan workout process essentially by a committee, it’s critical to identify a single person who is responsible for leading the effort. This should be the leader who will ensure the lender’s loan workout program addresses the issues related to the pandemic and who will ensure the tracking of guidance and dissemination of related information.
2. Implement a communication plan. Changes to guidance and processes are likely to occur rapidly, so it is critical to have a plan for communicating these evolving changes about the lender loan workout program – both internally and to customers.
3. Ensure line-of-business personnel understand the fluidity. Camp noted that the lender loan workout program will touch numerous areas of the financial institution: lenders, special asset officers, the credit department, the finance department, technology, and operations. He said it is vital for these parties to understand how quickly changes are being implemented so that they can be prepared to pivot in a timely manner. A challenge with managing the loan workout process is being able to address the program on a macro scale but also make adjustments for individual customers as necessary, Camp said.
4. “Flag” modified loans. Implement language in your system that will “flag” loans that the institution is electing to modify based on eligibility either under the CARES Act/Section 4013 or the Interagency statement, and make sure that “flag” is tied to the original loan number or terms so you are able to track the relationship between the old and new terms. This will help you for reporting purposes as well as for business intelligence, Moore said.
5. Ideally, tie the process for evaluating loans and the criteria for modifying them under Section 4013 into the modification workflow. And rather than creating a “flag” that simply indicates yes or no (as in “yes, it’s tied to Section 4013”), Moore suggests creating a “flag” that indicates a status, such as assessed/unassessed for modification, assigned to a loan officer, etc. These designations will make it easier to know the state of any given instrument at any point in the modification process and help track modification volumes.
6. Establish the “bright line” for a loan being current if using the interagency statement. If modifying loans under the interagency statement, the financial institution should establish and document the “bright line” point in time that qualifies the loan as being current at the time of the modification program implementation, Moore said. That is one of the criteria for qualifying for relief from accounting and reporting as a TDR. “It doesn’t have to be the date you signed the first [modification agreement], but get that locked in,” he said.