As financial institutions are working diligently to offer products, services, and programs conducive to helping borrowers during these times of COVID-19, it’s pertinent to consider potential regulatory compliance implications. Over the past several days, we have received many calls and questions concerning loan payment deferral programs. This article serves to highlight some considerations that should be given when formulating loan payment deferral programs.
- Universal Deferments: Instead of auto-applying payment deferrals to all borrowers, offer/process payment deferrals on a case-by-case basis as they are requested. Be cautious auto-applying deferments without a consumer request. As mentioned below, payment deferments are likely to result in increased interest charges over the full term of the loan (including maturity extension) as interest will likely continue to accrue during the deferment process and also during the extended maturity period.
- Interest Accruals: Disclosures should be clear (if applicable) that interest will continue to accrue during the deferment period and there may be a higher final payment if the maturity date is not extended.
- Maturity Date Extension: If the maturity date is extended be sure to disclose there will be additional interest charges.
- “No Cost” Deferrals: Utilize caution, or refrain (wink, wink), from using “no cost” to describe payment deferment programs even if there are no up-front charges imposed.
- Late Fees: Ensure no late fees are imposed as the deferment is processed and, as a result, no payments are made during the deferment period.
- Credit Reporting: Consider monitoring credit bureau reporting to ensure loans with processed deferments are not reported as having late payments.
- Escrow Payments: Be sure to disclose that escrow payments still need to be made and, that if they are not, the customer may have a shortage or deficiency for which they are responsible. Refer customers to their escrow disclosures.
- Approval Process: Ensure consistency in applying / underwriting / approving payment deferrals. Consider utilizing measurable and quantifiable standards.
- Adverse Action: Consider adverse action requirements if deferment requests are denied.
- “Skip” – a – Payment: Consider the differences in skipping a payment and deferring a payment. Disclose your program accurately.
- Flood Compliance: As payments are deferred and maturity dates extended, this will likely be viewed as a MIRE event resulting in flood compliance requirements.
- Troubled Debt Restructuring: Agencies have indicated 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.”
- Credit Insurance: If extending the loan maturity date, considerations should be given to insurance policy coverage expiration dates.
As payment deferrals/maturity extensions effect the contractual obligations between the bank and the consumer, we also recommend to consult with your Bank’s attorney.
Allen B. (Joey) Croom, II
CRCM | CAMS
e: joey@sentryadvisory.com
Resources:
https://www.fdic.gov/news/news/financial/2020/fil20022.html
https://www.fdic.gov/coronavirus/faq-fi.pdf
https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf
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