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Special Edition Nutter Bank Report: Working with Customers Affected by COVID-19

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1. Overview: Agencies Encourage Consideration of Customer Accommodations

The FDIC, OCC, and Massachusetts Division of Banks (DOB) each have recently issued updated guidance on accommodations for customers that banks should consider to address the financial needs of borrowers and depositors who have been adversely affected by COVID-19-related issues.

  • The FDIC and OCC separately issued statements on March 13, both of which encourage the depository institutions they supervise to take prudent steps to assist customers and communities affected by COVID-19 by, for example, waiving fees, offering repayment accommodations, extending payment due dates, and increasing daily withdrawal limits at ATMs.
  • The DOB issued similar guidance to Massachusetts-chartered insured depository institutions on March 16.

The agencies emphasized in each of their statements that prudent efforts to accommodate borrowers and other customers will not be subject to criticism if such actions are carried out in a safe and sound manner.

Click here for a copy of the FDIC’s statement to state non-member banks, here for a copy of the OCC’s statement to national banks and federal savings associations, and here for a copy of the DOB’s statement to Massachusetts-chartered insured depository institutions.

  • The federal banking agencies have also issued a joint statement encouraging banks to use their capital and liquidity buffers to support households and businesses affected by COVID-19, and an interim final rule amending the agencies’ regulatory capital rules to cause the automatic restrictions on capital distribution that apply if a banking organization’s capital declines by a certain amount to phase in more gradually.

Click here for a copy of the joint statement on capital and liquidity buffers, and here for a copy of the interim final rule on the phase-in of automatic restrictions on capital distributions.

2. Special Considerations for Customers Affected by COVID-19

Building on earlier regulatory guidance, the agencies’ statements encourage banks to work constructively with individuals and businesses in communities and industries affected by COVID-19. For example, the guidance recommends that banks may modify or restructure loans due to borrowers’ temporary hardships resulting from COVID-19-related issues. Considerations for such measures could include easing cash flow pressures to allow commercial borrowers to continue serving customers and paying employees and suppliers, improving their capacity to stay current on their debt service, and improving the bank’s ability to collect on its loans.

The agencies advise that modifications should be based on the facts and circumstances of each borrower and loan, and that banks consider whether such modifications should be evaluated to determine whether they represent troubled debt restructurings (TDRs). A modification triggers a TDR under applicable accounting standards only if the bank grants a concession to the borrower which it would not otherwise grant because the borrower is experiencing financial difficulties, according to the agencies. For example, a bank could extend the term of a loan for a borrower that otherwise meets the bank’s underwriting standards, but is experiencing a temporary liquidity shortage due to COVID-19-related economic conditions.

While a TDR designation means a modified loan is impaired for accounting purposes, it does not automatically result in an adverse classification, according to the guidance. According to the agencies, examiners will review the entirety of the lending relationship in such cases, including the duration of the borrower’s cash flow, other assets, value of the collateral, and other factors. The FDIC and DOB have directed their examiners to exercise flexibility in determining whether to adversely classify loans to borrowers that are impacted by COVID-19, including those designated as TDRs.

Nutter Notes: Banks should consider proactively reaching out to all customers to encourage them to contact the bank with any questions or concerns or any accommodation requests in the event of financial hardship. Banks considering accommodation requests on a case-by-case basis should establish clear guidelines and criteria, including appropriate written policies and procedures, to ensure fair and consistent application of COVID-19-related accommodations among all customers requesting assistance. For example, any accommodations made with borrowers must comply with the Equal Credit Opportunity Act. Internally, the authority to grant a customer’s request for an accommodation should be limited to specifically identified employees (such as lending officers or branch managers) who are properly trained in the applicable guidelines, criteria, and appropriate policies and procedures to promote fair and consistent application. Finally, all decisions about whether to grant a customer’s request for an accommodation should be properly documented.

3. Regulatory Capital Considerations

The federal banking agencies jointly announced two actions on March 17 that are intended to support the U.S. economy and allow banks to continue lending to households and businesses. 

  • Use of Certain Excess Capital

The first is a joint statement encouraging banking organizations to use the capital and liquidity they have built up in excess of regulatory minimums and buffers as they respond to the challenges presented by the effects of COVID-19. The agencies emphasized that these capital and liquidity buffers were designed to provide banking organizations with resources to support the economy in times of adversity such as the current pandemic. According to the joint statement, the agencies expect banking organizations to continue to manage their capital and liquidity prudently.

  • Easing Certain Restrictions on Capital Distributions

The second action is an interim final rule that amends the agencies’ regulatory capital rules applicable to banks, savings associations, and holding companies to modify the way in which the agencies’ automatic restrictions on capital distribution are phased in if a banking organization’s capital declines by a certain amount. The agencies’ regulatory capital rules require a banking organization to maintain a buffer of regulatory capital above its minimum capital requirements to avoid restrictions on capital distributions and discretionary bonus payments. According to the agencies, the buffer requirements are intended to limit the ability of banking organizations to distribute capital and therefore strengthen the ability of banking organizations to continue lending and conducting other activities during periods of economic stress. The agencies indicated that they are now concerned that the limitations on capital distributions could be sudden and severe if such banking organizations were to experience even a modest reduction in their capital ratios.

Nutter Notes: Under the regulatory capital rules, if a banking organization’s capital ratios fall within the buffer requirements, the maximum amount of capital distributions and discretionary bonus payments the organization can make is a function of its eligible retained income. Eligible retained income is currently defined as four quarters of net income, net of distributions and associated tax effects not already reflected in net income. The interim final rule revises the definition of eligible retained income to the greater of either (1) the banking organization’s net income for the four preceding calendar quarters (net of any distributions and associated tax effects not already reflected in net income), or (2) the average of the banking organization’s net income over the preceding four quarters. The agencies expect that the revised definition will allow banking organizations to more gradually reduce distributions as they encounter financial stress, and provide them with stronger incentives to continue to lend in such an environment, including the current pandemic. The interim final rule will become effective on the date it is published in the federal register, which is expected shortly.  The agencies will accept public comments on the interim final rule for 45 days after its publication.

4. Supervisory Relief and Regulatory Reporting

The agencies’ statements indicated that they will work with affected banks to reduce burden when scheduling examinations, including making greater use of off-site reviews. The guidance indicates that the agencies recognize that some banks may experience an increase in their levels of delinquent and nonperforming loans as a result of the pandemic. Examiners will consider the unusual circumstances created by COVID-19-related issues when reviewing a bank’s financial condition and determining the supervisory response, according to the guidance. The FDIC, OCC, and DOB encourage banks affected by COVID-19-related issues that expect to encounter difficulty meeting regulatory reporting requirements to contact their case managers to discuss these situations in advance. The agencies are prepared to work with affected banks, and will take into consideration each bank’s circumstances, according to the guidance.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Jason J. Cabral. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry

Tel: (617) 439-2087

Kenneth F. Ehrlich

Tel: (617) 439-2989

Michael K. Krebs

Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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