Tackling the COVID-19 Crisis – 10 Tips for Commercial Lenders
The declaration of the surge in cases of COVID-19 aka Coronavirus as a global pandemic appears to have caught many people off guard. Governments, businesses, and individuals seem largely to have been unprepared to handle the early days of this public health emergency. People are just beginning to realize the implications of self-quarantining, citywide and statewide shutdowns, and social distancing. Commercial lenders are no exception.
Consider these ten action items:
1. Check in with your customers. Contact each of your customers to see how they are dealing with the crisis, by telephone if possible. Tone is immensely important in times of turmoil, and a more personal approach will be much more reassuring than an email. Remind yourself your customers are as anxious as you are, if not more so. They can’t control the virus, the public response, governmental action, their customers’ reactions to that action, their suppliers, or you. If your bank has not yet decided what it will do for its customers, at least let your customers know that leadership is paying close attention and considering many possible options.
2. Decide whether to go all in with your accommodations now, or to save some additional measures if the crisis continues more than a few weeks. Be realistic, and encourage your customers to do the same in considering their needs. The sooner your customers return to their normal business levels, the sooner the accommodations should come to an end.
3. Don’t try to apply the same solution to every situation. Some sectors remain busy or have gotten busier as a result of the pandemic; others are still busy with work in process but will sooner or later run out of orders to fill if their customers do not return to work; and still others have been effectively shut down since the onset of preventive measures to stem the spread of the virus. Some customers with seasonal businesses may be minimally affected at this time of year, while others could be devastated. Different impacts from sector to sector will require different approaches, and you might end up employing a wide range of options depending on the situation.
4. Understand that many customers will need additional accommodations after the current crisis is over (retailers, restaurants, hotels, car dealers, homebuilders, and those in their supply chains are some, but by no means all, of the sectors hit particularly hard). Some customers might have a typical amount of work in their pipeline now, but consider the implications of social distancing and self-quarantining on your customers. For example, collision shops might be busy now, but fewer drivers on the road due to shutdowns encouraged or decreed by government officials will likely result in fewer auto accidents. This will be regarded as a positive effect by all but the collision centers, which will have fewer vehicles to repair.
5. Be mindful that otherwise typical responses to defaults may be perceived as aggressive and harsh in the current climate. Social media and the news media are already reporting about student housing landlords that are not allowing tenants out of their leases, even though the students have been sent home for the year. The fact that those landlords have to answer to their lenders, who may not yet have approved accommodations to their borrowers, is not being reported. Unlike the Great Recession, villains in this crisis are in short supply. Expect media outlets to pounce on the slightest misstep.
6. Use loan modifications to fix any deficiencies in your loan documentation. Review your loan documents and identify any issues, and use loan modifications as an opportunity to correct them. A modification is also a perfect time to have your customer ratify their obligations, to put a stop to mutual deviations from the loan terms, and to obtain a release for past actions that may provide your customer with defenses in the event you later need to enforce the loan documents.
If nothing in the loan documents needs correcting, it is acceptable to use email to communicate the accommodations you are willing to provide, but the better practice when using email is to communicate via a letter attached to your email. The letter should state precisely the accommodations you are willing to give. For example, if you have agreed to defer the April and May payments until maturity, be sure to state that regular payments will commence with the June payment. Also, state whether you intend to extend the maturity date accordingly or the deferred payments will be collected as part of the balloon payment at maturity. Prepare your letter, sign it, scan it and send it via email. This sets a different tone than simply sending an email that contains the accommodation terms and is less likely to result in a lengthy email exchange.
7. Know your loan documents. If the loan can be amended by a writing signed only by the Lender, then a letter will be sufficient; on the other hand, if the loan agreement requires the amendment be signed by both parties, add a signature line for the borrower and ask for it to be returned before the amendment will take effect. If your documents restrict your customer from incurring additional debt without lender consent, consider whether, and on what terms, you will allow additional borrowings. The goal here is not to exert control over your customer, but rather to allow additional funding to increase your customer’s chance of survival without creating excessive, unduly burdensome debt.
8. Know and understand your forms. Your standard form modification might not be right for what you intend to accomplish. You may be able to accomplish your intended amendment by attaching an exhibit to the standard form, but again, your description should be precise in order to avoid a future dispute over what the parties actually intended. Ambiguity can be expensive.
9. As always, be careful about the messages you are sending to your customers, especially in emails. Emails are “writings” and you may be amending the loan terms by mutually departing from the original terms. Use terms like “We are considering a short term modification of your loan based upon the following general terms” and “Subject to approval and documentation, following are the general terms of the modification we are proposing.”
10. Play the long game. You want your customer to succeed and grow, and ultimately to pay the loan in full. Fortunately, the vast majority of customers want to do the same. Take steps that will increase the likelihood that this will happen. The economy may be entering a period where fewer lenders will be willing to refinance a problem loan, so you may be in for a lengthier relationship than you would prefer. Customers in better financial shape will have more options, and you don’t want to lose a good relationship over a perception that you weren’t willing to work with them in very uncertain times.
As things presently stand, it appears the next several months could be unlike anything the lending industry has seen before, and a creative perspective will be needed in order to bring some certainty and positive results to commercial lending portfolios. If you have questions about how you can manage risk and protect the health of your portfolio, please contact us. The Financial Industries attorneys at Balch and Bingham are well-prepared to assist lenders in dealing with their customers during the Coronavirus crisis and beyond.