During this difficult time, community financial institutions are set up for success because they tend to be relationship lenders. But how can we be proactive instead of reactive? This is an opportunity for community financial institutions to focus on customer relationships. If they haven’t already, lenders can review their portfolios now instead of later. We need to stress how much we value our customers and help calm their fears. There are several ways that financial institutions can help their customers through this difficult time by restructuring current loans or offering new loans or lines of credit. Much of the information below isn’t new but is offered as a reminder.
Modification: Amodification is the restructuring of the loan. The modification is used to alter one or more terms of the loan, such as going from a variable to a fixed interest rate or extending the term. A loan modification agreement should be in your index of your loan document system.
Deferral: The deferral is different in that it postpones loan payments for a three- to six-month period. When choosing deferment plans, financial institutions should consider whether they want to offer deferments on a case-by-case basis or offer the plan to a certain segment of their portfolio.
When deferring payments, decide if you are deferring the payment or if you’re also deferring the interest. Typically, the payment is deferred so that the payment term goes out to whatever period that you are extending to and the interest continues to accrue. If a loan is deferred, the interest accrual will extend the loan. Adjust your core system to accommodate the new payment schedule per the change in the loan agreement.
Forbearance: A forbearance is used to reduce or suspend payments for a set time period. Financial institutions that utilize Freddie Mac and Fannie Mae refer to their respective websites, which indicate the suspension of payments for most customers – up to 12 months without any late fees. Foreclosures and litigation have been suspended for at least 60 days. Financial institutions that do escrow servicing can choose to suspend the loan payment but continue to collect the escrow so that there is no need to increase the escrow payment in the future. Collecting the escrow payment will keep the insurance and taxes current.
When using any type of loan restructuring, ensure that your documentation does not in any way jeopardize the default language in your existing documentation. If you are drafting a generic or universal agreement, it is important to use language, especially in your default language, that allows you to maintain your rights once this crisis has ended.
Lines of Credit: Financial institutions should encourage their customers to use their HELOCs or PLOCs at this time and may be able to offer increased line limits for creditworthy customers. HELOC activity has been increasing. Another option is to offer hardship term loans typically for up to 24 months.
This is a time for community financial institutions to be proactive not reactive. Communicate and encourage customers to use digital/mobile banking. If you do not have a call center, set up a hotline or central line for customers to get answers to their lending questions. If you are rotating staff or have work-at-home staff that has no work, train those staff members to take calls and answer questions so that your lending staff is freed up to handle more complex issues.
Crisis bumps us out of our comfort zones and into our creative zones. It is time to be innovative and think outside the box. It is time to live out your mission statement and core values. What we do during this crisis defines our long-term success. This is an opportunity. Make today matter with how you are serving the lending needs of your customer.