In the current Coronavirus crisis many of our clients are receiving requests from their customers to provide payment holidays or to reschedule payments.
In this article we will revisit the main available options. It is worth bearing these alternatives in mind when considering requests from customers to reduce or suspend payments.
What alternatives are available?
The three main alternatives that can be used in these circumstances are formal variation, modifying agreement or forbearance arrangements.
Formal Variation: A formal variation will be appropriate where you are prepared to agree to a permanent rescheduling of an agreement. In order to document the revised payment profile you will need to agree the length of any payment holiday, the level of reduced payments which will apply during the concession period together with the revised payments which will be payable for the remainder of the term. This may not always be possible given the uncertainties surrounding Coronavirus, the exact impact it will have on any customer’s business and how long its effects are likely to last. It may therefore be necessary to issue a forbearance letter initially with a view to formally rescheduling the agreement when the picture becomes clearer. It’s worth noting that variation agreements can only be used where the relevant agreement is non-regulated under the CCA. A modifying agreement must be used where the agreement is regulated.
Modifying Agreement: The FCA has recently issued a number of statements concerning Coronavirus. Whilst their detailed response is still being developed but the following FCA statement neatly sums up the regulator’s approach:
We are closely engaged with firms to understand the potential impacts on consumers of coronavirus. During this contact we continue to make clear that firms must treat customers fairly and consider the needs of those potentially affected by the impact of coronavirus.
We are aware some consumers may be put under additional financial pressure, so if you are experiencing payment difficulties, you should contact your credit provider or mortgage lender as soon as possible and explain your situation.
Assuming that you agree that a formal amendment to the payment profile of a regulated agreement is the right approach in a particular case, the amendment must by documented by a modifying agreement. The form of these is highly prescriptive and is set out in the CCA Agreements Regulations. Because of the complexity of the rules governing the form of modifying agreements and the procedures which must be followed in signing them many funders try to avoid them. However they are likely to represent the correct approach where a revised payment profile is agreed. We have prepared template forms of modifying agreement which comply with the Regulations and which should make the process as straightforward as possible.
Forbearance Arrangements: A forbearance or concession arrangement doesn’t legally vary the terms of the agreement. Instead it is (in theory at least) an informal arrangement where the funder indicates that it won’t insist on full payment being made in accordance with the agreed terms and that it will instead accept lower payments for a specified period of time. Arrangements of this type could be useful in the present environment as they can provide a quick interim fix until the effect of Coronavirus can be seen and a longer term solution can be put in place. They can also be used in both non-regulated and regulated transactions. Forbearance letters need to be carefully drafted to ensure that they are genuinely non-binding.