Our bank is looking at deferring loan payments for individuals or businesses who have financial hardships during this time. The Loan Operations manager has asked me about negative interest since this may occur. Does anyone have wise words about this issue? Should we have the customer pay interest and just defer principal?

I think that it is going to depend on how you defer the payments. If you are not extending the term and re-amortizing the loan, then depending on the loan amount, interest rate and remaining term - you might be setting them up for a substantial balloon payment.

Understood Randy. Right now our core provider will extend the maturity, which obviously could cause flood re-verification, etc. on real estate secured loans. Just trying to figure out the best option for those financially affected by the current issues.

As to consumer credit, would there be any disclosure issues - or simply a Change in Terms Agreement? We do not plan to extend the term but will add (or increase) a balloon payment. On lines of credit, we plan to freeze the line during the deferment period - would that require an Adverse Action?

No requirement for disclosure unless you are adding a variable rate feature through a modification.

Yes - freezing a line is adverse action.

I'm equating this situation similar to a defer-payment (FKA ski-a-pay) program and you'll need to clearly explain to the borrower in writing how the deferment will occur and how it impact the loan. I'm hoping examiners won't scrutinize this gesture as much as the holiday programs designed for the bank to make money, but there is still a potential for UDAAP if you don't clearly explain the terms.

We are considering giving a blanket skip a payment on all closed end term loans, not secured by RE. We sell GAP and also buy dealer contracts that may have GAP, so we are going to include a notification that the skip a pay could affect the member’s GAP and please contact us if they want the skip a payment reversed. We are disclosing the skip a pay is for one month and that their next payment will be on their regularly scheduled payment due date. We are also disclosing that if they have an automatic payment set up through a bill pay or other payment system they need to cancel their bill pay and reschedule it for the following month or the payment will be applied and the loan due date will also be advanced one month. We are disclosing that if they have an automatic payment set up with us either internal or ACH, their payment due date will be advanced one month and their current payment will not be processed. We also have the standard verbiage we use on our skip a payment applications that interest will continue to accrue during the skip payment period and they may need to make sure payments to payoff their loan. The skip a pay will be automatically processed through a computer script job and will not require any action by the borrower.

Does anyone have an actual form they have created?

Talk to your legal counsel. Depending on the loan type and what you are doing may dictate different approaches.

What about escrow payments when we do a modification to allow interest only payments (skip-a-pay)? Is it okay not to require escrow payments and then let the loan go through the analysis process to create a shortage? Seems like it could be a UDAAP issue but maybe I'm not thinking clearly.

We're discussing three (maybe more) fundamentally different loan repayment methods here--so there's not likely to be a one-size-fits-all solution to questions of this type. Follow Randy's advice and discuss the various possibilities with your legal counsel to be sure that any action you take does not inadvertently compromise asset values.

As you decide what to provide your borrowers, remember that this time the motivation for "deferring payments" is to provide relief, not to sell a convenience service. You might even look at these payment plan adjustments as the earliest stage of portfolio-wide workouts. As this crisis worsens, we may be faced with the need to forgive enough interest or debt to salvage assets that will certainly turn sour if borrowers are quarantined and cannot earn enough to feed their families--much less make loan payments.

Payment adjustment plans that require borrowers to pay accruing interest (with or without a fee for the accommodation) provide little or no cash flow relief for the borrower. That type of action may advance due dates and protect credit ratings, but it's not relief from the sudden loss or reduction in income due to a worldwide crisis.

Payment adjustment plans that capitalize current interest (negative amortization) provide cash flow relief, but they may be illegal--under current laws and regs. As we are seeing on a daily basis, laws meant for normal times can be suspended when extreme action is deemed to be in the public interest. If bankers need the option to capitalize interest in order to provide temporary relief in this crisis, state and federal legislators should be pressed to "pause" those laws until COVID-19 is history.

Payment adjustment plans that forgive loan interest (like workouts or SCRA interest rate reductions) would be a bitter pill, but less painful than losing entire loans to charge-off or bankruptcy. Should there be an element of forgiveness in a bank's pandemic-driven payment adjustments, it seems appropriate that the forgiven interest should count for CRA purposes. Everyone is temporarily L&M if they are ordered to stay home and can't work and be paid.

We are looking to defer a payment for 1 month for a customer but she has already taken part in our skip pay program. What is the number of times we can extend/defer an installment loan?

Under current guidelines from the regulators, you can take what ever actions you feel are appropriate to assist the customer.

Is that because of the pandemic or is that normal course of business? I don't want this to put us in a pickle given our skip pay program and the number of times a consumer loan can be extended.

We probably should have something outlined for the customer to sign then so they understand the extension - possibly adding on an extra month to the maturity of the loan, etc...?

We are also trying to help customers if needed. Alot of them are not able to come in to sign a change in terms extending payment due date and maturity can we does this without an actual change in terms signed?

Regulators care about excessive extensions because that's a way to hide bad loans--a safety & soundness concern. At the moment, their highest priority is preventing the entire U.S. economy from collapsing. As long as you're acting in good faith, don't worry about minor infractions of the normal rules in order to keep your customers afloat during this crisis.

How would this work for a HELOC where the bank wants to do a "pause" on payments for 90 days for affected customers? They don't want to do an extension or modification. If they are on an interest-only repayment, would that be a concern?

I know the horse is out of the barn - but all of these questions should have been part of the pandemic plan - planning is more than just making sure people are working remotely. Legal counsel needs to be consulted on a lot of these questions as much is going to depend on your legal agreement, State law, etc. There are no blanket answers.

Nicole - A "change in terms" agreement is a contract. I'm no lawyer, but have learned over the years that contracts can be valid if there's agreement between the parties and consideration. Under normal conditions, the agreement is documented in writing and signed by both parties. For bankers, today is the farthest from normal since the Great Depression...maybe even longer than that. Oral contracts present the risk of repudiation ("I never agreed to that!"), but a well-designed procedure can mitigate that risk. Be sure your BOD agrees that selected increases in the bank's risk tolerance are appropriate in light of the crisis, and then get the bank's attorney to advise you how to proceed.