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Federal R eserve Bank

D. M c T E E R , J R .






August 5, 1993
Notice 93-82


The Chief Executive Officer of each
member bank and bank holding company
Supervisory Practices for In s titu tio n s and
Borrowers Affected by Disasters

The Federal Reserve Board has announced a series of steps designed
to help ease financial stress in areas affected by flooding in the Midwest. A
supervisory statement adopted by the Board encourages financial institutions
to work constructively with borrowers who are experiencing difficulty due to
the flooding. The statement says that banks may find it appropriate to ease
credit terms to help new borrowers restore their financial strength, consis­
tent with prudent banking practices, and to restructure debt or extend
repayment terms for existing borrowers.
The Board also waived appraisal regulations for real estate related
transactions affected by the flooding, and temporarily amended Regulation Z
(Truth in Lending) to provide relief under waiver rules so that borrowers may
gain ready access to loan funds when they use their primary dwelling as
collateral for a loan.
Under the right of rescission, a borrower normally has three
business days to cancel a loan contract when it is secured by the borrower’s
principal dwelling.

Attached is the supervisory statement adopted by the Board.

For more information, please contact Earl Anderson, (214) 922-6152,
or Basil Asaro, (214) 922-6066.
For additional copies of this B a n k ’s notice,
please contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

Statement on
Supervisory Practices Regarding
Financial Institutions and Borrowers Affected by
Floods in the Midwestern United States
July 23, 1993

It has been a long-standing practice of the Federal
Reserve to promote supervisory actions that encourage regulated
financial institutions to work constructively with borrowers who
are experiencing difficulties due to conditions beyond their
The physical and business disruption caused by recent
heavy floods in the Midwest has placed financial pressures on
businesses and individuals in the affected areas, in some cases
adversely affecting their ability to repay loans in accordance
with original terms and conditions.

Often the financial

pressures stemming from such events are transitory in nature, and
borrowers are able to resume payments when economic conditions
improve or the borrowers' financial positions stabilize.


such circumstances, financial institutions generally determine
that the most prudent policy is to work with borrowers
experiencing difficulty, in a manner that is consistent with
sound business practices, rather than take more precipitous
actions such as foreclosure and/or forcing borrowers into
Lenders often find it in their and the borrowers'
interests to extend terms of repayment or otherwise to
restructure borrowers' debt obligations.

Such cooperative

efforts can ease pressures on troubled borrowers, improve their
capacity to service debt, and strengthen financial institutions'


ability to collect on their loans.

Financial institutions in

areas affected by the widespread flooding may also deem it
appropriate to ease credit terms, consistent with prudent banking
practices, for new loans to certain borrowers in order to assist
the borrowers to recover their financial strength and place them
in a better position to service their debts.

With proper risk

controls and management oversight, these actions can contribute
both to the health of the local community and serve the long-run
interests of lending institutions.

If carried out in a prudent

manner, such efforts by lenders will not be subject to examiner
Financial institutions in the affected areas may find
that their levels of delinquent and nonperforming loans will

Consistent with long-standing practice, the Federal

Reserve, in supervising these institutions, will consider the
unusual circumstances these institutions face in determining any
supervisory response.
One of the principal objectives of the examination and
supervision process is to achieve an accurate assessment of a
financial institution's loan portfolio and financial condition.
In carrying out its supervisory responsibilities, the Federal
Reserve recognizes that efforts to work with borrowers in
communities under stress, if conducted in a reasonable way, are
consistent with safe and sound practices as well as in the public
The Federal Reserve also recognizes that financial


institutions in disaster-affected areas may encounter difficulty
in complying with financial reporting requirements.


in disaster areas that have encountered difficulties complying
with such reporting requirements should contact the appropriate
Reserve Bank as soon as possible for further guidance.
In addition, the Federal Reserve reminds regulated
institutions of the availability of the recently announced
program on documentation for loans to small- and medium-sized
businesses and farms, which may assist lenders in meeting the
credit needs of borrowers in disaster areas.

This program allows

institutions that are adequately capitalized and have a CAMEL
rating of 1 or 2 to designate a basket of loans which examiners
will evaluate solely on the basis of performance and will not
criticize due to loan documentation.

To qualify for the

exemption, the loan may not exceed the lesser of $900,000 or 3
percent of the institution's total capital.

The total basket of

such loans may not exceed 20 percent of total capital.
There are also several initiatives in process pursuant
to the Depository Institutions Disaster Relief Act of 1992
(DIDRA), which provided the Federal Reserve and the other federal
banking agencies with the authority to grant certain regulatory
relief to financial institutions affected by major disasters.


provided in section 2 of DIDRA, the Board has waived the
appraisal requirements of Title XI of FIRREA and the Board's
regulation for real estate related transactions affected by the


Under section 4 of DIDRA, financial institutions may
seek, until April 23, 1994, relief from regulations governing
leverage capital requirements if they are experiencing a
temporary increase of assets due to the influx of insurance
proceeds or government assistance funds.

Financial institutions

that may need such relief should contact the appropriate Reserve
Pursuant to section 3 of DIDRA, relief was granted from
certain requirements under Regulation Z (Truth in Lending) that
related to consumers' right of rescission for certain loans
secured by their principal dwellings.

The authority to make

exceptions under section 3 of DIDRA has expired.

The Board has

approved similar relief through its existing authority under
Regulation Z.

In particular, a final rule has been approved to

temporarily amend Regulation Z regarding consumer waivers of the
right to cancel certain home-secured loans so that borrowers in
the major disaster areas may more readily gain access to loan
Finally, in keeping with the intent of DIDRA and
previous initiatives to encourage financial institutions to meet
the needs of communities devastated by major disasters, the
Federal Reserve, in assessing Community Reinvestment Act
performance, will give positive consideration to financial
institutions' participation in programs where most or all of the
financing provided may ultimately benefit low- and moderateincome borrowers or such neighborhoods located outside of an


institution's delineated community.
Specific questions on these initiatives should be
directed to the appropriate Reserve Bank.