US banks are scrambling to persuade Washington policymakers to extend the Dec. 31 expiry of an accounting waiver that has allowed lenders to give struggling borrowers more leeway on their loans, several bankers and lobbyists said.
If Congress fails to extend the relief as part of a new stimulus package being discussed by lawmakers, many lenders are likely to curtail loan modification programs, they said, making life much tougher for as many as 12 million Americans whose unemployment benefits are due to expire at around the same time.
"This provision has given credit unions and banks some assurance that if they work with borrowers that are having financial difficulty as a result of the pandemic, that they can work with those borrowers and not have supervisory scrutiny," said Ryan Donovan, Chief Advocacy Officer, Credit Union National Association. "That's going to go away."
To soften Covid-19's economic blow, Congress in March granted a federal moratorium on mortgage repayments.
To make it possible for lenders to defer those mortgages and voluntarily grant repayment holidays on credit card, auto and other loans without adverse repercussions for the borrower or lender, Congress also waived an accounting rule that usually requires modified loans to be classified as "troubled debt restructurings."
Loans classified as troubled debt restructurings are penalized by banking regulations and attract additional scrutiny from examiners and bank investors as an asset quality red flag.
Such loans are generally ineligible as collateral at the Federal Reserve, require a range of additional disclosures and, depending on the circumstances, can 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 US Congress allowed banks to suspend this accounting treatment so they could work with borrowers, but that waiver expires on Dec. 31, well before the end of federal and some state repayment moratoria and the broader public health crisis.
Lawmakers are wrangling over competing stimulus packages and some leading Republican senators publicly support extending bank regulatory relief. But as of Monday, it was unclear if any of the draft bills contained the provision, according to lobbyists.
Analysts at Stifel Financial Corp. said in a note on Monday that they were skeptical Congress would reach a deal this year, with the next opportunity likely to be February.
Of the banks which S&P Global covers, the median proportion of loans in forbearance, as of the third quarter, was 2.5%, down from about 8% in the second quarter. That downward trend indicates borrower stress has been declining since the end of June.
But if the economy performs poorly, borrowers who have exited forbearance may face new stress, S&P Global warned. Roughly 12 million Americans face a jobless benefit cliff when emergency stimulus runs out on Dec. 26, according to estimates by think tank The Century Foundation.
Washington regulators are advising banks to continue to help borrowers even if the relief expires, promising that examiners won't fault them for Covid-related troubled debt restructurings.
When asked about the expiring relief, Jelena McWilliams, chair of the Federal Deposit Insurance Corporation, told Reuters that regulators were working together "so that we can hit the ground running come Jan. 1." She did not elaborate.
But lenders are wary of informal reassurances after being punished by examiners and investors for accumulating troubled debt structurings during the banking crisis a decade ago, said the Credit Union National Association's Donovan.
In letters to Congress this month, banking groups across the country have warned that if the waiver expires, they would slow or delay modifications and loans may go into foreclosure.
Small businesses and consumers facing temporary disruptions in cash flow and wages will be hardest hit, the American Bankers Association said in letter to lawmakers last week.
The Independent Community Bankers of America has asked for an extension until Jan. 1, 2022.
Paul Merski, an executive vice president at the group, said extending the relief would cost the taxpayer nothing and should be a bipartisan matter.
"Banks have set aside substantial loan loss reserves, but if you can work out the loan with the business until they get over this pandemic, it's better for everyone," he added.