The Federal Financial Institutions Examination Council (FFIEC) has issued a statement to assist financial institutions and their customers affected by severe drought conditions across much of the Midwest and southern portions of the United States.
The FFIEC is strongly encouraging financial institutions in areas affected by drought conditions to work constructively with borrowers. The effects of natural disasters on the agricultural sector are often transitory, and prudent loan modification efforts can help stabilize borrowers, benefit the long-term interests of financial institutions and their stakeholders, and contribute to the health of local economies. In this regard, financial institutions may consider alternatives for borrowers who can demonstrate they are hurt by the drought. Such alternatives may include:
If drought conditions persist, some agricultural borrowers may need to carry over a portion of operating lines of credit that cannot be retired because of lower crop yields. Financial institutions should perform a comprehensive review of an affected borrower’s financial condition in an effort to implement prudent loan workout arrangements.
The FFIEC will support efforts to originate and prudently modify loans that help agricultural borrowers recover financially and be better positioned to honor obligations as conditions improve. When conducting examinations and other supervisory activities, examiners will consider the unusual circumstances financial institutions are facing in the affected areas. Financial institutions that implement prudent loan workout arrangements will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse classification or credit risk grade.
Financial institutions should ensure that modifications of existing loans are evaluated individually to determine whether they require financial reporting as troubled debt restructurings (TDRs). This evaluation should be based on the facts and circumstances of each borrower and loan; this requires judgment since not all modifications are TDRs. Financial institutions should refer to the instructions for the Consolidated Reports of Condition and Income (for banks and savings associations) and the 5300 Call Report (for credit unions); Accounting Standards Codification Subtopic 310-40, “Receivables – Troubled Debt Restructurings by Creditors;” and other supervisory guidance for the accounting and reporting of TDRs.