Holding the line
In the overwhelming majority of cases during the pandemic, the inability of a business to repay a loan ... cannot be pinned on mismanagement by business owners."
Banks have led as economic first responders during the pandemic, even as some government partners changed the rules of the Paycheck Protection Program and other relief efforts. The pandemic is lingering and there is unease that the rules may change again when it comes to regulatory criticism.
Hotel and hospitality loans — to include some made by community banks in smaller locales — are a particular issue. The growing concern is that regulators may begin downgrading previously current loans. Amidst the ongoing emergency, such a turn would run counter to the joint regulator statement issued last spring when the crisis began:
“The agencies encourage financial institutions to work with borrowers, will not criticize institutions for doing so in a safe and sound manner and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs),” the March 22 statement read.
To be clear, downgrading a loan that was headed in the wrong direction before the onset of COVID-19 would be appropriate. But in consideration of the joint statement, to reclassify a stable pre-pandemic loan while the crisis continues is tantamount to punishing banks for helping adversely impacted business owners in compliance with available regulatory guidance. And the reclassifying, or the threat of reclassifying, a performing loan simply because of the industry it serves flies in the face of guidance provided when the pandemic began.
There are seasons to the economy. But this is no ordinary season. It is the greatest economic crisis in nearly a century. In the overwhelming majority of cases during the pandemic, the inability of a business to repay a loan — especially those in industries hardest hit by COVID — cannot be pinned on mismanagement by business owners. And, unlike previous crises, it cannot be blamed on poor decision-making by banks.
The emergency has gone on longer than the six months referenced by regulators in their joint statement. This is rightfully worrisome for regulators, but it is unsettling for us all. It is not the fault of banks and it is not the fault of their customers. Regulators and banks can and should continue to work together to see Americans and the banking system through this difficult time.
A robust regulator-industry dialogue to discuss special considerations and accommodations for COVID-related troubled loans is appropriate. It requires thinking outside of traditional boxes. But a unilateral return to standard, pre-pandemic regulatory practices while this prolonged biological and economic disaster persists will have a counter-productive impact on the banking system that regulators work hard to protect. And it will be devastating to the enterprises and small businesses that banks have so effectively served.
Banks were asked by regulators to provide relief to their customers. Until the emergency is over, we respectfully ask that regulators hold the line and do the same for banks that have helped American small businesses survive.