Is a COVID-19 temporary loan modification a troubled debt restructure?

Lenders are often reluctant to do short term loan modifications because they would be forced to treat the modification as a troubled debt restructuring (“TDR”). The Financial Accounting Standards Board requires the Lender to treat a TDR as a problem loan and create loss reserves.

On March 19, 2020, the Chairman of the FDIC wrote to the Acting Technical Director of the Financial Accounting Standings Board to request the following:

  • To exclude COVID-19 related modifications from being considered a concession when determining a TDR classification. As financial institutions wish to assist the customers, it would be unfair for such modifications for COVID-19 to be classified as a TDR. SEE HERE
  • For relief for banks from recently enacted accounting standards which may “strain the ability of financial institutions to serve their depositors who currently meet the credit needs of their communities.” These pertain mostly to current expected credit losses (“CECL”). The FDIC wants the banks to focus on the challenges presently facing them rather than newly implemented regulations.

The Result

On March 24, 2020, the FDIC issued a communication to regulated institutions. The goal was to encourage financial institutions to work constructively with borrowers impacted by the COVID-19. The FDIC worked jointly with the Board of Governors of the Federal Reserve System, the Office of the Comptroller of Currency, the National Credit Union Administration, State Banking Regulators and the Consumer Financial Protection Bureau. The inter-agency statement applies to all financial institutions that are FDIC supervised, including those with total assets under $1 billion dollars. The FDIC has indicated that it:

  • Encourages financial institutions to work constructively with borrowers affected by COVID-19.
  • Will not criticize institutions for prudent loan modifications and will not direct supervised institutions to automatically categorize COVID-19 related loan modifications as TDRs.
  • Confirmed with the staff of the Financial Accounting Standards Board that short term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
  • Will use the same standards for modifications for borrowers of one to four family residential mortgages where not past due or carried in non-accrual status. The residential mortgage modifications do not result in loans being considered restructured or modified for the purpose of respective risk-based capital rules.
  • Deems the prudent loan modification programs of financial institution customers affected by COVID-19 as positive actions that effectively manage or mitigate adverse impacts on borrowers due to COVID-19 and lead to improved loan performance and reduce credit risk.

The inter-agency statement further states that for past due reporting, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the loan documents. If a financial institution agrees to a payment deferral, this may result in no contractual payments being past due and these loans are not considered past due for the period of the deferral.
It is recommended that each financial institution refer to the applicable regulatory reporting instructions as well as internal accounting policies to determine if loans to stressed borrowers should be reported as non-accrual assets in regulatory reporting. However, the short term COVID-19 arrangements should not be reported as non-accrual.

In addition, financial institutions should further be aware that loans with COVID-19 restructures will continue to be eligible as collateral for Federal Reserve Bank’s discount window based on the ordinary criteria.

Takeaway

  1. A loan does not have to become a TDR just because a bank, in good faith, made a COVID-19 restructuring. These restructurings generally should be treated as short term. The modification agreement should state that it is as a result of the COVID-19 pandemic. In order for a loan to get a COVID-19 modification, the borrower must be current prior to any relief. Prudent practice should suggest that banks immediately evaluate their portfolios and determine if COVID-19 modifications are appropriate while borrowers are still current.
  2. Loans on one to four family residential mortgages which are current and are not carried in non-accrual status, do not result in loans being considered restructured or modified for the purpose of risk-based capital rules.

There are many twists and turns. Please feel free to reach out to one of our financial services attorneys if you would like further detail. We can help you with the modification agreement and the navigation of these new rules. Click below to contact us.