WASHINGTON (Reuters) – U.S. banks are working to persuade policymakers in Washington to extend the Dec.31 expiration of an accounting waiver that has allowed lenders to give distressed borrowers more leeway on their loans, have declared several bankers and lobbyists.
If Congress does not extend relief as part of a new stimulus package being discussed by lawmakers, many lenders are likely to cut back on loan modification programs, they said, making life much harder for them. up to 12 million Americans whose unemployment benefits are due to expire. about the same time.
“This provision has given credit unions and banks the reassurance that if they are working with borrowers who are in financial difficulty as a result of the pandemic, they can work with those borrowers and not be subject to surveillance scrutiny.” , said Ryan Donovan, director of advocacy. , National Association of Credit Unions. “It will go away.”
To mitigate the economic blow from COVID-19, Congress granted a federal moratorium on mortgage payments in March.
To allow lenders to defer those mortgages and voluntarily grant repayment holidays on credit cards, auto loans and the like without negative repercussions for the borrower or lender, Congress also waived an accounting rule that requires Typically modified loans are classified as “distressed debt restructurings.”
Loans classified as distressed debt restructurings are penalized by banking regulations and come under closer scrutiny by bank examiners and investors as a red flag of asset quality.
Such loans generally do not qualify as collateral with the Federal Reserve, require a range of additional information and, depending on the circumstances, may require up to twice as much capital as regular loans, according to regulatory experts.
The alternative for lenders looking to avoid a troubled debt restructuring is to foreclose on the loan.
The U.S. Congress has allowed banks to suspend this accounting treatment so they can work with borrowers, but this waiver expires on Dec.31, well before the end of federal and some state repayment moratoria and the broader crisis in debt. public health.
Lawmakers are fighting over competing stimulus packages, and some prominent Republican senators are publicly backing expanding bank regulatory relief. But on Monday, it was not clear whether any of the bills contained this provision, according to lobbyists.
Analysts at Stifel Financial Corp. said in a note Monday that they were skeptical that Congress would reach a deal this year, with the next opportunity likely being February.
Among banks covered by S&P Global, the median proportion of loans in forbearance in the third quarter was 2.5%, compared to about 8% in the second quarter. This downward trend indicates that borrower stress has eased since the end of June.
But if the economy performs poorly, borrowers who have come out of forbearance could face new stress, S&P Global has warned. According to estimates by think-tank The Century Foundation, about 12 million Americans face a cliff in unemployment benefits when emergency stimulus runs out on December 26.
Regulators in Washington are advising banks to continue helping borrowers even if relief expires, promising examiners will not blame them for troubled COVID-related debt restructurings.
Asked about the expiration of the relief, Jelena McWilliams, president of the Federal Deposit Insurance Corporation, told Reuters that regulators are working together “so that we can start as early as January 1”. She has not developed.
But lenders are wary of informal assurances after being punished by examiners and investors for building up troubled debt structures during the banking crisis a decade ago, Donovan of the Credit Union National Association said.
In letters to Congress this month, banking groups across the country warned that if the waiver expires, they will slow or delay changes and loans could be foreclosed.
Small businesses and consumers facing temporary disruptions in cash flow and wages will be hit the hardest, the American Bankers Association said in a letter to lawmakers last week.
The Independent Community Bankers of America has requested an extension until January 1, 2022.
Paul Merski, the group’s executive vice president, said extending the relief would cost the taxpayer nothing and should be a bipartisan affair.
“Banks have set aside significant loan loss reserves, but if you can settle the loan with the company until it gets over this pandemic, it’s better for everyone,” he said. he added.
Reporting by Pete Schroeder and Michelle Price; additional reporting by Imani Moise; Editing by Sonya Hepinstall