Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.

Date: May 21, 2020
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject: In the Rush to Forebear, Don’t Forget Safety and Soundness Requirements.

One afterthought of extending forbearance and deferrals on mortgage loans is the impact on requirements that regulated financial institutions maintain safety and soundness requirements. Traditionally, granting borrowers the right to skip or defer payments was only extended to the most credit worthy borrowers. The COVID-19 (“C-19”) crises has “turned that on its head.”

For example, a borrower who is unemployed is less likely to be able to cure delinquency or return to the ability to be able to comply with original loan terms, then one who is employed. Granting ongoing forbearance or deferral to large numbers of unemployed borrowers can be deemed to violate safety and soundness requirements.

The FDIC has recently issued guidance on the subject (See OCC Bulletin 2020-15; FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance). These guidelines and responses to FAQ, clarify Federal Financial Institutions Examination Council Uniform Retail Credit Classification and Account Management Policy (FFIEC “) requirements and include:

  •  Guidance that Banks granting C-19 forbearance, document the reasons why the forbearance granted was appropriate.
  •  Guidance that Banks offering temporary relief to borrowers likely unable to return to performance of loan obligations, be considered for longer term options, including liquidating workouts.
  •  Providing accurate disclosures applicable under state and federal law.

The FDIC guidance is illustrative for all regulated financial institutions. Clearly, the FDIC is providing flexibility for Banks to respond quickly to this crisis. However, in the rush to provide relief, don’t ignore regulatory requirements that may require that you explain why what you did was effective, not just necessary.

Please call or email if you have a question.

Spencer Scheer