Managing loan workouts is a chief concern among banks and credit unions these days.

During a recent webinar hosted by Abrigo, 14% of attendees said their institutions had offered restructuring programs in bulk to commercial borrowers since the pandemic began (see chart below). However, most lenders (56%) said they preferred having commercial borrowers be the ones to reach out first to discuss loan options.

Now, as temporary modifications come to an end or in other cases, conditions have worsened for borrowers, lenders previously focused on handling Paycheck Protection Program loans are turning concerted attention to managing loan workouts. Financial institutions must consider what’s next for many of their commercial loans – whether it’s another modification or moving the loan toward a status of troubled debt restructuring, or TDR.

This need to manage what’s expected to be a large volume of loan modifications is just the latest complexity for lenders in 2020. But while this year’s tumult has meant long hours for many bankers, it has also created openings to solidify relationships with borrowers and address the needs of communities in which financial institutions operate, said Regan Camp, Managing Director of Abrigo’s Advisory Services.

“We have a unique opportunity to continue to play in working toward a strong recovery and mitigating the impact along the way to both our respective institutions as well as to the borrowers that we serve,” he said.

Tackle process-related decisions for managing loan workouts

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.
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Review allowance practices when managing loan workouts

  1. Evaluate the appropriateness of present segmentation/practices for the allowance for credit losses (ACL) or allowance for loan and lease losses (ALLL). Even if loans are not labeled as TDRs, they might not retain their current credit risk profiles, so it’s a good time to examine the financial institution’s process for segmenting loans when estimating the allowance, Moore said.
  2. Establish criteria for modifications. This is a critical aspect of managing loan workouts, and it is important to show regulators that the financial institution is applying the loan modification process fairly to borrowers. Criteria can be based on business type, industry, performance, product, or instrument. Moore and Camp said it’s important to document the criteria selected for a modification and why decisions are made as they are made, rather than after the fact.
  3. Integrate information across the enterprise. Having information available across the financial institution will make the loan modification process more efficient. The last thing you want is to have a critical document stored on one person’s hard drive, where it is at risk of being lost.
  4. Establish and monitor workflows. Finally, it’s important to make sure to have processes for continuing to monitor and “triage” loans – for seeing where borrowers stand and for identifying where loans are deteriorating over time. “Keep an eye on the overall workflow,” Moore said.
About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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