As a result of the pandemic, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, have issued a number of statements encouraging banks to offer payment accommodations to Borrowers under existing loans, such as allowing borrowers to defer or skip payments or extend the payment due date. As a consequence, your lender may be more agreeable than you might otherwise expect towards deferring monthly installment payments on an existing loan.
On March 9, 2020, the regulatory agencies issued a statement to encourage financial institutions to meet the financial services needs of their borrowers affected by COVID-19. More to the point, the federal regulatory agencies encouraged the banks to offer “payment accommodations, such as allowing borrowers to defer or skip payments or extending the payment due date, which would avoid delinquencies and negative credit bureau reporting caused by COVID-19-related issues.” The agencies emphasized that prudent efforts to modify the repayment terms on existing loans for small businesses would not be subject to examiner criticism or the classification of the loan in a negative manner.
On April 7, 2020, the agencies issued a revised statement on loan modifications that clarified that, regardless of any relief provided by the CARES Act, the agencies reaffirm their encouragement that banks work prudently with borrowers who are or may be unable to meet their payment obligations because of the virus. This statement reiterated that the agencies view such loan modification programs as “positive actions” and that the agencies consider such “proactive measures” to be in the best interest of the banks, their borrowers, and the economy. Further, the statement underscored that the banks have “broad discretion” to implement prudent modification programs.
An April 15, 2020 FAQ posed the question:
“Payment Accommodations. Would it be acceptable for a bank to offer borrowers affected by COVID-19 payment accommodations, such as allowing borrowers to defer or skip some payments or extending the payment due date?
Yes. The FDIC encourages financial institutions to provide borrowers affected in a variety of ways by the COVID-19 outbreak with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Such assistance provided in a prudent manner to borrowers facing short-term setbacks could help the borrower and a community to recover. The FDIC understands that effective loan accommodation programs may involve protracted resolutions, but all should be ultimately targeted towards loan repayment.
Financial institutions may want to consider addressing any deferred or skipped payments by either extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan . . .”
Most importantly, if a bank permits a borrower to skip payments and the borrower fulfills the terms of the modified payment schedule, the bank reports the account as current. However, if an account was delinquent before the coronavirus pandemic, the bank must continue to report the account as delinquent unless the account is brought current under the original payment terms.
As a result, it is in the banks’ interests to defer principal and/or interest payments. Payments deferred to a later date will, in effect, keep the loan current. If the bank does not defer payments, and the borrower is unable to make the regularly scheduled payments, the loan will be delinquent and recategorized in a manner adverse to the banks’ interests.
What if payments are deferred? When must deferred payments be paid? Banks have a number of options.
Many banks are treating deferred principal payments in a manner different from deferred interest payments. With respect to deferred principal payments, banks may require that the deferred principal be paid on the last day of the deferral period. In the alternative, banks may re-amortize the deferred principal payments into the remaining note balance over the original term and recalculate the payments of principal and interest over the remaining life of the loan. A third option would be to make the deferred principal payments due and payable as a balloon payment on the loan’s maturity date. Banks may also extend the maturity date.
Deferred interest payments may be due and payable in full on the last day of the deferral period.
The pandemic has created uncertainty with respect to small business’s ability to repay existing loans, and the government is encouraging banks to help. In this environment, all small business owners should feel comfortable approaching their banks to discuss a deferral of principal and/or interest payments.