There’s no sugar coating the fact that things are about to get real for credit union lenders. As an untold number of members ask their credit unions to follow through on CARES Act promises, lending teams are likely to be stretched thin as they work out an entirely new set of muscles.
For many credit unions, forbearance agreements are not an aspect of business as usual (But then again, what is these days?). Therefore, team members may be rightly nervous about stepping too far out of procedural and regulatory bounds. One way to alleviate their concerns is to adopt the ritual of copious documentation.
If you’re wondering how exhaustive paperwork is supposed to calm nerves, allow me to explain...
When credit union leaders are challenged to make fast decisions, especially when embroiled in highly unusual situations, regulators have been known to relax criticism... if the credit union can provide evidence of how and why certain decisions were made. Although there are limits to any regulator’s leniency, documented timelines, reasoning and outcomes can help an examiner justify his or her finding.
Every credit union’s documentation ritual will look different. However, these are a few of the more critical moments you’ll want to consider memorializing in writing:
New procedures for considering, granting and servicing loan forbearance and policies around the range of terms that will be applied, as well as the types of loans or member profiles to which they will be applied, must be documented as early as possible. While the CARES Act applies only to government-backed loans, such as those purchased or securitized by Fannie Mae or the U.S. Department of Agriculture, some credit unions may choose to apply the same terms to any loan within their portfolios, should the member demonstrate need. Some state governments are encouraging lenders to consider that very thing.
Legal counsel advice on how to structure forbearance agreements should also be recorded. Whether you’re using the credit union’s own general counsel or an outside firm, it will be important to document the expert resources that helped create the agreements and any factors that were considered if those agreements include clauses that may be considered unusual. For a good starting place on how agreements like this could be structured, consult the Fannie Mae Servicing Guide. Even if you’re looking for guidance on non-government-backed loans, it’s a thorough resource that can provide some context around the expectations for providing solutions to borrowers facing difficulty. The U.S. Department of Housing and Urban Development (HUD) also has sample forbearance agreements that are used for HUD-backed loans that can serve as a good template for the development of your own. But again, you will want to make sure you tailor your agreements to the expectations and requirements you have set at your credit union.
In addition to the individual forbearance agreements you prepare for borrowers, you’ll want to also document any exceptions made to the policies you and your board solidified. If, for instance, you provide relief to a member who does not meet every one of the criterion your policies mandate, you must be able to explain why that decision was made.
Procedures for servicing loans in forbearance are another critical piece of documentation that can help your lending team navigate the rocky waters of member care during tough times. One best practice to consider is reaching out to the member 30 days ahead of the forbearance period’s end. Although the remedy for getting them caught up on their loan payments is typically spelled out in the forbearance agreement, things change. Keeping the lines of communication open between your credit union and the member may help head off any impending difficulties they have meeting an obligation they committed to months earlier during a highly emotional and scary time.
Options for “what’s next” for the member will be another key set of information to supply your lending teams. When a loan officer reaches out at that 30-day point and learns the member is still struggling, what will he or she be allowed to offer in terms of loan modifications? Will the credit union consider lowering the rate, approving a refinance, extending the term of the loan or perhaps even offering partial loan forgiveness? Clearly documenting the options available, and the criteria members must meet to qualify for them, will be a welcome resource for the “people helping people” who staff your loan servicing department. Your risk team will also appreciate the black-and-white evidence that their framework was considered as the credit union determined the options that would help members while securing the safety and soundness of the cooperative.
These are unprecedented times and things are moving really, really fast, so it’s understandable for credit union staff to want to skip documentation steps. Remind your team that, especially in circumstances like the ones we’re facing today, written evidence of their prudent decision protects them just as much as the member.