Health Check: Your Loan Portfolio and the Current Economic Environment

• March 20, 2020
• Amanda Garnett

This blog is being posted on behalf my colleagues, Susan Sabo, financial institutions principal, and Diana Jordan, director of credit risk services.

By the time you read this message, you will have undoubtedly seen numerous updates from regulators and our governing bodies about the impact and possible economic downturn stemming from COVID-19. Whether you are a lender or employ lenders, you may be asking yourself “Where do I begin?”

Start with these best practices, designed to help financial institutions manage loan portfolios during this difficult time.

Lender spotlight
Lenders are the face of every financial institution. They are in your schools, communities, and neighborhoods. We suggest three steps for lenders to consider as they navigate these unchartered times:

1. COMMUNICATE: Reach out to your most vulnerable customers — commercial and consumer. Many companies are closing or significantly reducing work hours and not all are large enough to pay their employees through this time.

2. DOCUMENT: Keep notes from your conversations with borrowers. Listen to their needs and measure their reaction. During times of global stress, people often need someone to listen.

3. MONITOR: Remain in touch with your higher risk customers. As this issue evolves, consider the positive or negative implications to your customers.

Come together internally
Lenders will likely have the most direct interaction with your customers. Therefore, it is critical to establish a team approach for managing the loan portfolio during this period. Internal teams should consider these three steps:

1. COMMUNICATE
• Consider forming an internal group and assign individual ownership of your critical lines of communication — regulators, auditors, customers, vendors, and employees.

• Reach out to your primary regulator and keep them apprised of your approach. Be certain to let them know if you may not be able to meet your regulatory reporting requirements.

2. DOCUMENT
• Assess your loan portfolio by industry type and/or risk characteristics. Utilize NAIC codes in the core system to evaluate your portfolio. Be cognizant of upstream and downstream impacts to industries.

• Strive to remain aligned with your current policies. Document loan modifications and changes in policy, even if temporary.

• Build a master workbook of all borrowers with modifications. It should contain original contractual terms, modified terms, and a TDR designation field.

• Give credence to your other qualitative factors in your allowance for loan and lease losses (ALLL) calculation. Discuss and document as a group how you will consider the economic impact of COVID-19 and apply it to your ALLL model.

• Use your business continuity and disaster recovery plans as a starting point and adapt, as necessary.

3. MONITOR
• Meet regularly. The information coming from of our regulatory agencies and government bodies has been frequent. Be prepared to react, as necessary.

How CLA can help
CLA stands ready to assist financial institutions in many ways including but not limited to:

• Implementing a process around TDRs

• Providing regulatory guidance interpretation and support

• Supplementing the staffing of your financial institution or your customers directly impacted by the economic impacted COVID-19

If you are already a CLA client, we will be contacting you further in the coming days. We want you to know you have a resource by your side through this unprecedented time.

If you are not a current CLA client, we are still here to help and we encourage you to contact us.

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