COVID 19 – The Economy and Commercial Loans

March 21, 2020

Businesses and their people are adjusting to the new normal of COVID 19 – working from home, shifting from dine-in business to delivery service, and making hard decisions regarding payroll and layoffs.  Banks, credit unions and other lenders are also adjusting to an abrupt shift from Bull to Bear outlooks. Everyone is scrambling to remain flexible when it is so unpredictable what the future holds. The hospitality industry, including restaurants, hotels and resorts, and amusement centers, have been particularly hard-hit already.  We have been asked to help our lender and hospitality clients to free up capital to cover losses from shuttering or drastically reducing business operations in the near-term and perhaps into the early summer.

Fortunately, banks have more than doubled their capital and liquidity levels over the past decade, and are now substantially safer and stronger than they were in 2009. This week, the FDIC and other regulatory agencies encouraged banks to use those resources to support households and businesses. Businesses are also stronger than they were previously and may be better able to withstand a downturn.

What can be done to help?  Here are some links to FAQs on the FDIC website to help both lenders and their customers:

Frequently Asked Questions for Financial Institutions re COVID 19 Issues

Frequently Asked Questions for Bank Customers re COVID 19 Issues

From the Bank’s perspective:

  • Identify those customers most vulnerable to lost revenue and reach out to them
  • Consider providing payment accommodations in a prudent manner to borrowers facing short-term setbacks. Generally, a lender would not need to report such adjusted loans as delinquent if the loan was in good standing prior to the outbreak and payments are made according to the modified loan terms
  • Explore Community Development opportunities and work with affected customers and communities, particularly those that are low- and moderate-income, pursuant to the Community Reinvestment Act (CRA)
  • If owners are uncomfortable with property inspections due to concerns related to COVID-19, consult with appraisers and other persons performing real estate inspections about alternative arrangements
  • Consult with appraisers about how to address any short-term, temporary reduction in the income stream produced by income-producing real estate that has been affected by COVID-19

Customer’s perspective:

  • Review your loan documents and decide if you are likely to default in the next few months
  • Be proactive and contact your loan officer sooner rather than later, with open information about best and worst case scenarios
  • Ask for longer reporting timeframes for financial statements and other audits or reports
  • If applicable, ask to adjust or waive covenant calculations for a short period of time until business resumes
  • Reduce principal and interest payments or switch to interest only on a short term basis
  • Businesses may want to make use of excess cash flow and untapped assets to leverage new lines of credit to smooth the revenue stream over the next few months
  • Explore new and expanded Small Business Administration (SBA) loan programs aimed at providing disaster relief

Short term payment accommodations and other considerations that Lenders and their customers agree upon can provide valuable breathing room.  Banks should take this opportunity to perform file audits on stressed credits to identify any missing items or terms that may need a long term adjustment.

Customers should not hesitate to seek help and guidance from their banking partners during this anxious time. Together, we can persevere until life (and the economy) returns to normal.