Lending institutions that serve farmers affected by the 2012 drought are being encouraged by the Federal FinancialInstitutions Examination Council to work with borrowers to modifyloans, ease credit terms and expedite credit decisions.

The FFIEC said in a release Tuesday that it will “supportefforts to originate and prudently modify loans” for affectedfarmers. In exchange for their efforts, lending institutions willreceive consideration from examiners regarding the unusual circumstances in affectedareas, the FFIEC said.

“Financial institutions that implement prudent loan workoutarrangements will not be subject to criticism for engaging in theseefforts even if the restructured loans have weaknesses that resultin adverse classification or credit risk grade,” the FFIECsaid.

Typically, agricultural credit lines are paid in full aftersummer and fall harvests, and before farmers borrow money for seed,fuel and other supplies necessary to plant the next year's crop.However, because the drought has reduced yields significantly, andin some areas, destroyed crops completely, the FFIEC acknowledgedthat “some agricultural borrowers may need to carry over a portionof operating lines of credit that cannot be retired because oflower crop yields. Financial institutions should perform acomprehensive review of an affected borrower's financial conditionin an effort to implement prudent loan workout arrangements.”

Because the effects of natural disasters on the agriculturalsector are often transitory, the council said prudent loanmodification efforts can help stabilize borrowers, benefit thelong-term interests of financial institutions and theirstakeholders, and contribute to the health of local economies.Acceptable solutions suggested by the FFIEC include:

• expediting lending decisions when possible, consistent withsafe-and-sound credit practices;
• extending or restructuring borrower debt obligations,consistent with prudent loan workout standards;
• easing credit terms or fees for loans, consistent with prudentloan workout standards; and
• considering loan programs offered by the U.S. Department ofAgriculture's Farm Service Agency or the U.S. Small BusinessAdministration.

Lenders evaluate modifications to determine whether they requirefinancial reporting as troubled debt restructurings, becausenot all modifications are TDRs, the FFIEC said.

Credit unions should refer to 5300 Call Report instructions andother supervisoryguidance for the accounting and reporting of TDRs, the councilconcluded.