As COVID-19 was causing widespread panic throughout United States, businesses were shuttered, threatening the financial security of our members. Answering the call, Credit Unions jumped into action aiding members.
The NCUA and other regulatory bodies also jumped into action. On March 22, 2020, a memo was released suggesting widespread regulatory relief would be coming on COVID-19 related modifications. Five days later, President Trump signed the Coronavirus Aid Relief, and Economic Security Act (CARES Act), parts of which led the Interagency Statement to be revised on April 7, 2020. The NCUA updated its supervisory priorities in July, specifically referencing the revised memo as a priority as part of the NCUA’s assessment of allowance for loan loss adequacy.
As we are adjusting to the new normal, we should begin to think about how the moves we have made to help our members throughout the pandemic will be looked upon by our examiners and auditors.
Here are some key points from the revisions and updated guidance:
The revised statement doesn’t double down, it triples down on this qualifier
The agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.
How do examiners determine safety and soundness? Through exams! You should expect and prepare for the NCUA to scrutinize your actions related to mitigating credit risk during COVID-19 just like any other.
The guidance includes a new paragraph addressing credit risk
The agencies’ 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 direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs) and have confirmed with the Financial Accounting Standards board that short term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
The guidance doesn’t mandate these figures, but uses as an example less than 30 days past due at time of modification and a duration of six months or less.
The guidance specifically references allowance for loan loss adequacy
All loan modifications should comply with applicable laws and regulations and be consistent with safe and sound practices (including maintenance of appropriate allowances for loan and lease losses)
The expectation here appears to be that regardless of the classification of a loans’ impairment status after being impacted by COVID-19, losses are likely to increase and allowance for loan loss adequacy is going to be scrutinized.
What you should be doing
- Monitor the performance of your loans receiving emergency assistance. Be prepared to illustrate your determination of whether or not a loan should be classified as a troubled debt restructuring and to determine if/when these borrowers have gotten back on their feet. Specifically, have they started making payments consistent with the terms of their modification? Were additional extensions required?
- Consider the impact to borrower ability to repay, particularly with larger credits and for commercial loans, and consider incorporating additional reserves related to those specific loans.
- Have you incorporated a qualitative factor into your loan loss reserve? Do you have a plan for phasing that qualitative factor out of your reserve calculation as the economy begins to normalize?
- Consider how the pandemic is impacting your capital position and forward-looking profitability. Do concentrations of risk exist and is our capital position adequate to maintain core operations throughout the pandemic?
Despite the commitment to avoid handcuffing financial institutions in providing borrower assistance, the responsibility of the NCUA remains with the protection of consumers and their respective insurance funds. Examining the safety and soundness of your financial institution is paramount to that objective. You should be prepared for normal levels of scrutiny, and potentially additional layers related to the pandemic.
Contact 2020 Analytics to learn how we can help you quantify this information while understanding the risks and opportunities within your loan portfolio.