Independent Banker - November 2020 - 37

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certified public accountant at Wipfli
LLP in Milwaukee.
" The pandemic has really shown
" Community bankers can address the
new risk profile by applying historical
loss rates-those from the Great Recession
years, for example-to their current
portfolios, " she says. " They can assess
the likely impact on earnings and on capital
for at least two years and implement
appropriate defensive and recovery capital
planning strategies. "
In addition to stress test guidance from
regulators, firms like Wipfli are providing
web-based seminars and roundtable
discussions to share ideas and best practices
with bankers, she says.
Further risk considerations
Stress testing mortgages that have been
sold to Freddie Mac, Fannie Mae and
other government agencies need to
take into account a provision under the
Coronavirus Aid, Relief, and Economic
Security (CARES) Act that enables borrowers
affected by COVID-19 to have
automatic forbearance for up to 12
months if requested, says Ron Haynie,
ICBA's senior vice president of mortgage
finance policy.
" For stress testing, banks may have
to make some assumptions on what
percentage of their portfolio of loans
sold to agencies will go into forbearance
after the initial period, " he says.
" For loans that haven't been sold and
are not subject to the automatic right of
forbearance, banks are trying to be consistent
to prevent any issues from a fair
lending perspective. "
For forbearances and other hardship
assistance on any type of loan,
enhanced quality control and testing
measures may be needed to validate
that all incoming requests are being
processed consistently and fairly, says
Britt Faircloth, consulting manager
for fair and responsible banking at
Wolters Kluwer Compliance Solutions
in Waltham, Mass. " In addition, fair
lending analysis is critical and should
the importance of stress testing. "
-Daniel Bockhorst, South State Bank
include analysis of disparities in denial
rates, disparities in average pricing
and some form of benchmark overlap
or comparative file review testing
where applicable, " Faircloth adds.
Banks should also consider fair lending
monitoring related to Paycheck
Protection Program (PPP) loans they
made, she says. Geographic analysis
can help determine fair and equitable
levels of service for both underwriting
and servicing mortgage and PPP loans
across all demographics.
So far, regulators have been " very
accommodating " to banks and have
allowed them to grant forbearance on
all sorts of loans. Under the CARES
Act, banks do not have to classify
them as troubled debt restructurings,
if the accommodations are COVID-19
related, says Christopher Cole, ICBA's
executive vice president and senior
regulatory counsel. " That's been helpful
to a lot of our community banks, "
he says. " The regulators have indicated
this accommodation will continue
until the end of the pandemic, which
could go into 2021. "
The impact on underwriting
Underwriting practices have also been
affected by the pandemic, according
to Suzanne Konstance, vice president
of product management and marketing
at Houston-based Wolters Kluwer
Lien Solutions.
" Much of the information lenders
had to rely on in the past-debtor's
past behavior, modeling outcomes-
has changed and is unpredictable in
the COVID-19 environment, " says
Konstance, who is based in Greenwich,
Conn. " While originating new loans,
lenders are becoming extra cautious
and looking for ways to minimize the
losses on the portfolio. "
Due to these factors, Konstance
and her team expect that banks will
apply liens to more loans than they did
before to mitigate the higher level of
risk and uncertainty in lending.
" In the past, UCC filings were sometimes
overlooked for certain loans,
whether because, traditionally, liens
weren't applied at that loan type or
value, or due to a lack of understanding
of the benefits, " she says. " In times
of crisis, the benefits of UCC filing
become more pronounced and help
minimize risk and improve recoveries. "
But with higher levels of risk, more
oversight should also take place, Konstance
says. Best practices require
that lenders monitor their debtors
for changes or new activity, that they
understand their order to collect on
the collateral, and that they are alerted
if a competitor files a lien on a debtor.
Banks should also consider vendors
that can provide automation and integration
capabilities to facilitate their
work with borrowers, government
agencies and other stakeholders, she
says. " As we have seen recently with
the impact of stay-at-home orders
and remote workforces, automating
transactions so that a human touch is
not needed can be critical, " Konstance
says. " Automation doesn't just add
efficiency; it can actually keep business
flowing. "
Katie Kuehner-Hebert is a writer
in California.
independentbanker.org Q 35
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Independent Banker - November 2020

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