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FEDERAL RESERVE BANK OF NEW YORK M 10&&Y F ebruary 4, 1994 DISASTER RELIEF Supervisory Measures to Ease Financial Stress in Areas Affected by the Los Angeles Earthquake To A ll Depository Institutions in the Second Federal Reserve District, and Others Concerned: The Board o f G overnors of the Federal Reserve System has issued the follow ing statem ent: The Federal Reserve Board has announced a series of steps designed to help ease financial stress in areas affected by the California earthquake. A supervisory statement adopted by the Board encourages financial institutions to work constructively with borrowers who are experiencing difficulty due to the earthquake and its aftermath. The statement says that banks may find it appropriate to ease credit terms to help new borrowers restore their financial strength, consistent with prudent banking practices, and to restructure debt or extend repayment terms for existing borrowers. Printed on the follow ing pages is the text o f the Supervisory Statem ent issued by the Board o f G overnors on January 25; questions regarding this m atter may be directed to D onald E. Schm id, M anager, D om estic Banking D epartm ent (Tel. No. 212-720-6611). W il l ia m J. M c D o n o u g h , President. / H 'o b & y Statement on Supervisory Practices Regarding Financial Institutions and Borrowers Affected by The January 17, 1994 California Barthquake January 25, 1994 I t h a s been a lo n g - s t a n d in g p r a c t i c e o f t h e F e d e r a l R ese rv e t o prom ote s u p e r v is o r y a c t i o n s t h a t en co u ra g e r e g u la t e d f i n a n c i a l i n s t i t u t i o n s t o work c o n s t r u c t i v e l y w ith b o rro w ers who a re e x p e r ie n c in g d i f f i c u l t i e s due t o c o n d it io n s beyond t h e i r c o n tr o l. The p h y s ic a l and b u s in e s s d is r u p t io n c a u se d by th e ea rth q u a k e in th e Los A n g e le s a rea h a s p la c e d f i n a n c i a l p r e s s u r e s on b u s i n e s s e s and in d iv i d u a l s in th e a f f e c t e d a r e a s , in some c a s e s a d v e r s e ly a f f e c t i n g t h e i r a b i l i t y t o rep a y lo a n s in a cco r d a n ce w ith o r i g i n a l term s and c o n d i t i o n s . O ften th e f i n a n c i a l p r e s s u r e s stem m ing from su ch e v e n ts a r e t r a n s i t o r y in n a tu r e , and b o rrow ers a r e a b le t o resum e paym ents when econ om ic c o n d it io n s im prove or th e b o r r o w er s' f i n a n c i a l p o s i t i o n s s ta b iliz e . Under su ch c ir c u m s ta n c e s , f i n a n c i a l i n s t i t u t i o n s g e n e r a l ly d e te r m in e t h a t t h e m ost p ru d en t p o l i c y i s t o work w ith b o rro w ers e x p e r ie n c in g d i f f i c u l t y , in a manner t h a t i s c o n s i s t e n t w ith sound b u s in e s s p r a c t i c e s , r a th e r th a n ta k e more p r e c i p i t o u s a c t i o n s su ch a s f o r e c lo s u r e a n d /o r f o r c in g b o rro w ers i n t o b a n k ru p tcy . L enders o f t e n f in d i t in t h e i r and t h e b o r r o w e r s' i n t e r e s t s t o e x te n d term s o f repaym ent o r o th e r w is e t o r e s t r u c t u r e b o r r o w e r s' d e b t o b l i g a t i o n s . Such c o o p e r a t iv e e f f o r t s can e a s e p r e s s u r e s on tr o u b le d b o r r o w e r s, im prove t h e i r c a p a c it y t o s e r v i c e d e b t, and s tr e n g th e n f i n a n c i a l i n s t i t u t i o n s ' jff lo&zr 2 a b i l i t y t o c o l l e c t on t h e i r lo a n s . F in a n c ia l i n s t i t u t i o n s in a r e a s a f f e c t e d by th e ea rth q u a k e may a l s o deem i t a p p r o p r ia te t o e a s e c r e d i t te r m s, c o n s i s t e n t w ith p ru d en t b an k in g p r a c t i c e s , f o r new lo a n s t o c e r t a i n b o rrow ers in o r d e r t o a s s i s t t h e b o rro w ers t o r e c o v e r t h e i r f i n a n c i a l s t r e n g t h and p la c e them in a b e t t e r p o s itio n to s e r v ic e t h e ir d e b ts. W ith p ro p er r i s k c o n t r o l s and management o v e r s i g h t , t h e s e a c t i o n s can c o n t r ib u t e b o th t o t h e h e a lt h o f t h e l o c a l community and s e r v e t h e lo n g -r u n i n t e r e s t s o f le n d in g i n s t i t u t i o n s . I f c a r r ie d o u t in a p ru d en t m anner, su ch e f f o r t s by le n d e r s w i l l n o t be s u b j e c t t o exam in er c r i t i c i s m . F in a n c ia l i n s t i t u t i o n s in th e a f f e c t e d a r e a s may f in d t h a t t h e i r l e v e l s o f d e lin q u e n t and n on p erform in g lo a n s w i l l in c r e a se . C o n s is t e n t w ith lo n g - s t a n d in g p r a c t i c e , t h e F e d e r a l R e s e r v e , in s u p e r v is in g t h e s e i n s t i t u t i o n s , w i l l c o n s id e r t h e u n u su a l c ir c u m s ta n c e s t h e s e i n s t i t u t i o n s f a c e in d e te r m in in g any s u p e r v is o r y r e s p o n s e . One o f th e p r i n c ip a l o b j e c t i v e s o f t h e e x a m in a tio n and s u p e r v is io n p r o c e s s i s t o a c h ie v e an a c c u r a te a s s e s s m e n t o f a f i n a n c i a l i n s t i t u t i o n ' s lo a n p o r t f o l i o and f i n a n c i a l c o n d i t i o n . In c a r r y in g o u t i t s s u p e r v is o r y r e s p o n s i b i l i t i e s , t h e F e d e r a l R e se rv e r e c o g n iz e s t h a t e f f o r t s t o work w ith b o rrow ers in co m m u n ities under s t r e s s , i f co n d u cted in a r e a s o n a b le way, a r e c o n s i s t e n t w ith s a f e and sound p r a c t i c e s a s w e l l a s in t h e p u b lic in te r e s t. The F e d e r a l R e se rv e a l s o r e c o g n iz e s t h a t f i n a n c i a l i n s t i t u t i o n s in d i s a s t e r - a f f e c t e d a r e a s may e n c o u n te r d i f f i c u l t y M i ° ^ n 3 in co m p lyin g w ith f i n a n c i a l r e p o r t in g r e q u ir e m e n ts . I n s titu tio n s in e a r t h q u a k e - a f f e c t e d a r e a s t h a t a r e e n c o u n te r in g d i f f i c u l t i e s co m p ly in g w ith su ch r e p o r t in g r e q u ir e m e n ts sh o u ld c o n t a c t t h e S t a t i s t i c s Departm ent o f t h e San F r a n c is c o F e d e r a l R e se r v e a t (415) 9 7 4 -3 1 4 5 a s soon a s p o s s i b l e f o r f u r t h e r g u id a n c e . In a d d it io n , th e F e d e r a l R e se rv e rem ind s r e g u la t e d i n s t i t u t i o n s o f th e a v a i l a b i l i t y o f t h e program on d o cu m en ta tio n f o r lo a n s t o s m a ll- and m ed iu m -sized b u s in e s s e s and fa rm s, w hich may a s s i s t le n d e r s in m e e tin g t h e c r e d i t n e e d s o f b o rro w ers in d is a s te r a rea s. T h is program a llo w s i n s t i t u t i o n s t h a t a r e a d e q u a te ly c a p i t a l i z e d and have a CAMEL r a t in g o f 1 o r 2 t o d e s ig n a t e a b a s k e t o f lo a n s w hich ex a m in ers w i l l e v a lu a t e s o l e l y on t h e b a s i s o f perform ance and w i l l n o t c r i t i c i z e f o r d e f i c i e n c i e s in lo a n d o c u m e n ta tio n . To q u a l i f y f o r t h e e x em p tio n , th e lo a n may n o t e x c e e d th e l e s s e r o f $ 9 0 0 ,0 0 0 o r 3 p e r c e n t o f th e i n s t i t u t i o n ' s t o t a l c a p i t a l . The t o t a l b a s k e t o f su ch lo a n s may n o t e x c e e d 20 p e r c e n t o f t o t a l c a p i t a l . T here a r e a l s o s e v e r a l i n i t i a t i v e s in p r o c e s s p u rsu a n t t o t h e D e p o s ito r y I n s t i t u t i o n s D is a s t e r R e l i e f A c ts o f 1992 and 1993 (DIDRA), w hich p r o v id e d th e F e d e r a l R e se r v e and t h e o th e r f e d e r a l b an k in g a g e n c ie s w ith t h e a u t h o r it y t o g r a n t c e r t a i n r e g u la t o r y r e l i e f t o f i n a n c i a l i n s t i t u t i o n s a f f e c t e d by m ajor d is a s te r s . As p r o v id e d in s e c t i o n 2 o f DIDRA - 1 9 9 2 , f o r r e a l e s t a t e r e l a t e d t r a n s a c t io n s a f f e c t e d by th e e a r th q u a k e , t h e Board may w a iv e th e a p p r a is a l r eq u ir e m e n ts o f T i t l e XI o f FIRREA a s w e ll a s t h e B o a r d 's a p p r a is a l r e g u la t i o n . M- io(o?y 4 Under s e c t i o n 3 o f DIDRA - 1 9 9 3 , f i n a n c i a l i n s t i t u t i o n s may s e e k , u n t i l A p r il 1 , 1 9 9 5 , r e l i e f from r e g u la t i o n s g o v e r n in g le v e r a g e c a p i t a l r e q u ir e m e n ts i f th e y a r e e x p e r ie n c in g a tem p orary in c r e a s e o f a s s e t s due t o t h e i n f l u x o f in s u r a n c e p r o c e e d s o r governm ent a s s i s t a n c e fu n d s. F in a n c ia l i n s t i t u t i o n s t h a t may n eed su ch r e l i e f sh o u ld c o n t a c t t h e S u p e r v is io n , R e g u la tio n and C r e d it D epartm ent o f t h e San F r a n c is c o F e d e r a l R e se rv e a t (415) 9 7 4 -2 9 3 2 . P u rsu an t t o s e c t i o n 2 o f DIDRA - 1 9 9 3 , in t h e e v e n t o f a m ajor d i s a s t e r su ch a s th e e a rth q u a k e, e x c e p t io n s may be g r a n te d from th e Truth in Lending A ct and t h e E x p e d ite d Funds A v a i l a b i l i t y A ct i f th e e x c e p t io n can r e a s o n a b ly be e x p e c te d t o p rod u ce b e n e f i t s t o th e p u b lic t h a t o u tw eig h p o s s i b l e a d v e r se e ffe c ts. For exam p le, th e Board may approve tem p orary r e l i e f from R e g u la tio n Z r e g a r d in g consum er w a iv e r s o f t h e r i g h t t o c a n c e l c e r t a i n h om e-secu red lo a n s so t h a t b o rro w ers in t h e m ajor d i s a s t e r a r e a s may more r e a d i l y g a in a c c e s s t o lo a n fu n d s . F i n a l l y , in k e e p in g w ith th e i n t e n t o f DIDRA and p r e v io u s i n i t i a t i v e s t o en co u ra g e f i n a n c i a l i n s t i t u t i o n s t o m eet t h e n e e d s o f com m u n ities d e v a s ta te d by m ajor d i s a s t e r s , t h e F e d e r a l R e se r v e , in a s s e s s i n g Community R e in v e stm en t A ct p erfo rm a n ce, w i l l g iv e p o s i t i v e c o n s id e r a t io n t o f i n a n c i a l i n s t i t u t i o n s ' p a r t i c i p a t i o n in program s w here m ost o r a l l o f t h e f in a n c in g p r o v id e d t o ea rth q u a k e v i c t i m s may u l t i m a t e l y b e n e f i t lo w - and m o d era te-in co m e b orrow ers o r su ch n e ig h b o rh o o d s lo c a t e d o u t s id e o f an i n s t i t u t i o n ' s d e l in e a t e d com m unity. 0 5 S p e c i f i c q u e s t io n s on t h e s e i n i t i a t i v e s sh o u ld be d i r e c t e d t o t h e S u p e r v is io n , R e g u la tio n and C r e d it D epartm ent o f th e San F r a n c is c o F e d e r a l R ese rv e a t (415) 9 7 4 -2 9 8 6 o r 2 9 6 5 . !D < o
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