National Credit Awareness and Resolution Association, Inc.

Regulatory and supervisory agencies across the U.S. issued an Interagency Statement on April 7, 2020 regarding loan modifications and reporting for financial institutions working with customers affected by the Coronavirus pandemic. The statement includes the following:

 

“The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. The agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers in a safe and sound manner”.  

 

The statement also states: “The agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. The agencies consider such proactive measures to be in the best interest of institutions, their borrowers, and the economy. This approach is consistent with the agencies’ longstanding practice of encouraging financial institutions to assist borrowers in times of natural disaster and other extreme events although the agencies recognize that the effects of this event are particularly extreme and broad-based. The agencies also will not criticize institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan. Financial institutions have broad discretion to implement prudent modification programs consistent with the framework included in this statement.”

 

So, especially in times of material economic stress, it is imperative that small business stand-up and be responsible for understanding, preparing, and recommending repayment solutions with their creditors. Creditors need their assistance, and a cooperative win-win relationship is being prudent – even if the numbers are bad. Now, if the business is a ‘zombie’ business (no possible way of repayment), then, frankly, it’s dead. You’ll have to decide if it can somehow be brought back to life. If you can get a pulse, you may as well approach your creditor and the two of you will have to decide if your plan is prudent or nonsensical. 

 

Yes, it’s important and in the best interests for lenders to prudently work with their debtors and accept small business’ best good-faith repayment resolution recommendations. It’s unlikely that creditors are going to be able to give distressed small businesses the necessary time and attention into finding solutions like that of a small business owner. Owners demonstrate ownership, and they’re capable and willing to step forward and offer solutions to their own repayment problems. Now is the time for a paradigm shift – putting small business in charge of crafting and presenting its best-effort repayment solutions to its creditors.