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Responsible Lending During Covid-19

Now more than ever, responsible lending and risk management are vital to alternative lenders. Managing enhanced risks during times of economic stress may require you to review your credit risk rating systems and to modify loans. 

Reviewing your credit risk rating systems

Risk rating systems were not designed to take into consideration Acts of God, such as the COVID-19 pandemic. Therefore as lenders, you will have to review and adjust your risk rating system.

The data relied upon to test a customer’s credit risk may have been compromised due to the immediate economic shock caused by the pandemic. Also in most cases, we know that SMEs have generally been prioritising salaries and utility bills. 

The traditional scoring systems would interpret this negatively and provide these customers with high-risk ratings. And while this may actually be so, remember that as alternative lenders, identifying clients that require urgent support will help to build client-lender loyalty and strengthen your company’s brand.

It is important to remind clients that you care and that they’re not just a means to an end. Client and loan scores are crucial information in considering a loan request made by a customer– and that the overall score represents the right mix of the two.

LoanCirrus recognises that each business will have its unique way of thinking about this and so we enable you to manage the balancing.

With a rapidly changing credit landscape, it is critical to set up the right monitoring infrastructure to support lending decisions. This will minimise the company’s downside risks, while building out capabilities that will make them better at managing the expected credit risk challenges ahead. 

Loan modifications 

Disruptions caused by the virus are upending the global economy. States and federal governments are encouraging lenders to negotiate loan modifications and forbearance with affected borrowers in an attempt to lessen the burden.

In particular, your customers in the hotel, restaurant, event, and retail industries may be in financial distress and want to discuss various options with you their lender. This may include a possible default waiver and modification of the loan documents to avoid future defaults or a loan workout with a forbearance agreement.  LoanCirrus makes it easy to modify loans so you can better serve your customer.

If the borrower’s cash flow appears to be a temporary issue, deferment of payments may be a reasonable solution. However, any agreement to forbear or modify the terms of a loan should be paired with additional or revised financial reporting. In addition to standard reports, LoanCirrus gives lenders the ability to create customized reports.

As a lender, how are you monitoring the temporary relief programs that are now in place? 

US federal regulators, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the State Banking Regulators issued a statement on April 7, 2020, to guide financial institutions who are working with borrowers affected by COVID-19. 

Under the guidance, the agencies will not direct financial institutions to automatically classify COVID-19-related loan modifications as troubled debt restructurings (TDRs) − this includes short-term loan modifications such as payment deferrals, fees waivers or extensions of repayment terms.

Other countries such as Australia have also enacted legislation or issued emergency orders to promote loan modifications and forbearance. 

As part of the Government of Australia’s response, on 20 March 2020, the Treasurer announced a temporary six-month exemption from some responsible lending obligations for loans to small business customers that are also consumers.

Regulation 28RA introduces a new temporary exemption for licensed lenders, credit assistance providers, lessors and exempt special purpose funding entities (SPVs) from certain responsible lending obligations in the Act. The exemption period runs from 3 April 2020 until the end of 6 months.

While you are positioning your institution to support those in the need of assistance during this difficult time, in effort to practice responsible lending, your business still needs to manage and monitor risk management on a regular basis. Loan Cirrus strives to assist in navigating these unchartered waters. 

Reach out to us for a personal demo of how LoanCirrus can meet your lending needs. 

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