Distressed Loan Servicing - A Sign of the Times

As the result of the corona virus and resulting economic fall-out, a number of commercial/agricultural borrowers may struggle to perform on their obligations and thus require loan restructuring to continue in business.  This article is thus intended to provide advice and guidance to lenders who may not have faced these challenges to date.

 While distressed loan servicing may pose significant new challenges, if addressed on a structured approach, it can significantly reduce risk, facilitate timely correction of borrower loan defaults and may ultimately contribute to strong customer loyalty. 

 To begin, distressed loan servicing should be approached as a new credit decision to an existing borrower with significant credit weaknesses.  Thus lender due diligence needs to be as thorough, if not more so than due diligence for a new loan to a new borrower.  Thorough due diligence is required to ensure the full extent of borrower credit weaknesses are identified and credit risk is reduced through appropriate loan restructuring.  This will also help ensure debt restructuring does not contribute to delayed collection action and compounded credit risk.  As a result, updated and verified credit information should include the following as applicable:

 -     Updated and verified borrower income and financial information,

-        Verification of all borrower debt obligations, not limited to in-house obligations,

-        Updated verification and valuation of all chattel collateral,

-        Updated RE collateral appraisals as needed.

 Updated information would thus form the basis for any proposed restructuring or collection action as needed.

 In addition, a “Loan Restructuring Policy” is recommended to help ensure distressed loan servicing is consistently addressed by applicable lending staff and results in timely restructuring and/or collection action.   Loan restructuring policy should include the following:

-     Designated lending staff to handle distressed loan restructuring,

-        Specific delinquent loan contact requirements, to include borrower personal and/or phone contacts,

-        Required timelines for obtaining updated borrower credit information,

-        Defined timelines for credit classification changes, accrual status changes and allowance for loan loss adjustments,

-        A distressed borrower letter template, which includes the following;

 ·       Specific notice to the borrower that they are distressed and required to respond to the notice within a specified and reasonable timeframe, i.e. 45 days,

·       A detailed list of information the borrower is required to submit with their response, i.e. current income and/or financial information, etc.

·       Borrower’s proposed loan restructuring/servicing action to address correction of existing credit weaknesses,

·       Specific contact information identifying the credit officer responsible for serving their account.

 This distressed loan letter will help ensure distressed borrowers are dealt with timely and consistently, thereby helping to restore borrower viability whenever possible and instituting collection action when required.

 Additional distressed loan servicing procedures are recommended to include the following:

 -        Review of existing loan legal documentation, to identify potential   deficiencies and ensure correction through any restructuring action,

-        Identify local legal counsel with collection experience to be consulted for legal advice on collection actions involving bankruptcy or foreclosure.

 While legal collection action (bankruptcy and foreclosure) is considered the last alternative for collecting defaulted loans and may be expensive, legal advice for these actions may significantly reduce ultimate collection costs.

 Bottom line, a well-structured distressed loan servicing process will help restore borrower viability on a timely basis, significantly reduce credit risk and contribute to significant borrower loyalty.

 Randall Pownell is a semi-retired agricultural banker and credit examiner.  He has over seven years of managing high risk agricultural accounts with Farm Credit Services.  He has over 32 years experience as a credit examiner and financial regulator.

Pactola Launches New Services

Listen up!  Pactola announces new services to support your credit administration functions.  These are Credit Risk Advisory (a/k/a Loan Review) and Contracted Problem Loan Management.  Both of these divisions are staffed with a team of seasoned credit veterans with experience in areas of commercial, agricultural, indirect, home equity, and other types of lending.  We also offer various individual services offered on an ala carte basis. 

One big feature is much of this review work can be completed remotely via our secure portals to transport file information safely. Discussions with officers can be made over the phone or using video chat systems like Teams or Zoom.   In today’s world where we deal with remote work environments and limited visits from outsiders, this feature helps limit face-to-face contact. 

Our Credit Risk Advisory Services is designed to help you evaluate the efficacy of your credit risk management function to ensure that the credit risk review mission is clearly set forth and sets objectives as defined by the Board and management.  Credit risk review function is driven by a sound risk assessment tailored to your institution.  Credit risk is evaluated properly, as defined by policy and scope, while values is added via insight and observations of individual lending credit relationships, sectors, portfolios, collateral, purpose, and economic trends.  Reporting includes findings prioritized based upon risk, root causes of systemic deficiencies, practical solutions to address core problems, management corrective plans, and best practice considerations. 

Ultimately, if you are spending lots of money for a third-party loan review report that just checks the box of an examiner requirement, this process is falling quite short of what a good review process can accomplish.  Our approach is to provide you with a study that shows the strengths and weakness of your credit organization and provide you with a path to improve. 

Contracted Problem Loan Management can provide additional support to your credit team to help manage the upcoming problem loans that we will all see from the impact of the economic downturn and lockdown.  Many institutions do not have a seasoned special asset group internally they can send their problem credits to be managed.  This requires either hiring problem credit managers, which can be expensive.  Existing staff can also manage their problem credits.  The challenge here is so much time will be spent on problems that you will lose good credit opportunities that your competitors will be jumping on. 

Another option is to partner with seasoned credit folks to help manage some of your problem credit accounts.  We have a team of professionals who have experience with managing problem credits that can assist your team, thus saving you time to focus on your good clients while saving you labor cost of additional staff. 

Our Credit Risk Advisory Services are led by Gary Stoley.  Gary spent 33 years as a regulator with the OCC before retiring in 2010.  He has experience with all areas of credit from policy framework to collections.  His experience is in many sectors of lending:  small business, oil and gas, agriculture, C&I, asset based lending, secured financing, A/R lending, factoring, home mortgage, equity, indirect auto, and unsecured personal loans.  You can contact Gary at gary.stoley@pactola.com

Our Contracted Problem Loan Management  is led by Randall Pownell.  Randy has over four decades of experience with commercial and agricultural lending with extensive experience with collections and problem loan management with the Farm Credit Services.  You can contact Randy at randall.pownell@pactola.com