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Loan Modifications: How COVID-19 Measures Are Affecting the Financial Services Industry

4/7/20 – Larry Brown

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The financial industry regulatory agencies recently issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The United States has been operating under a presidentially declared emergency since March 13, 2020 and, despite being identified as an essential industry, financial institutions and their customers have been faced with a number of challenges as a result of COVID-19.  

“The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. The agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers in a safe and sound manner. As described below, institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings (TDR), and the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.”

The regulatory agencies are The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the State Banking Regulators (hereafter, the “agencies”).

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act creates a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles (GAAP) related to TDRs for a limited period of time to account for the effects of COVID-19.

“The agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. The agencies consider such proactive measures to be in the best interest of institutions, their borrowers, and the economy. This approach is consistent with the agencies’ longstanding practice of encouraging financial institutions to assist borrowers in times of natural disaster and other extreme events although the agencies recognize that the effects of this event are particularly extreme and broad-based. The agencies also will not criticize institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.”

The agencies originally issued a statement on March 22, 2020, to encourage financial institutions to work prudently with borrowers and to describe the agencies’ interpretation of how current accounting rules under U.S. GAAP apply to certain COVID-19-related modifications. The interagency statement provided guidance concerning accounting for loan modifications under Financial Account Standards Board (FASB) Accountings Standards Codification (ASC) Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors.

The following is a summary of issues addressed related to loan modifications in response to COVID-19 :

  • Section 4013 of the CARES Act allows institutions to account for eligible loan modification either under section 4013 or in accordance with ASC Subtopic 310-40.
  • To be eligible for accounting for Loan Modifications under section 4013
    • Loan modification must be related to COVID-19
    • Executed on loan that was not more than 30 days past due as of December 31, 2019
    • Executed between March 1, 2020 and earlier of
      • 60 days after the date of termination of the National Emergency
      • December 31, 2020
      • Section 4013 eligible loans will not apply to TDR accounting, no analysis is required and not required to be reported as TDRS in regulatory reports
      • Institutions should still maintain records of the volume of section 4013 loans
      • Interest rate concessions, payment deferrals or loan extensions will not be considered concessions on 4013 loans
      • For loans that do not meet 4013 eligibility or institution chooses not to apply section 4013:
        • Modifications of loan terms do not automatically result in TDRs.
          • Short-term modifications less than 6 months include payment deferrals, fee waivers, extensions of repayment terms or other insignificant delays/modifications.
          • Borrowers are deemed current if they were current (less than 30 days past due) on their payments at the time that the modification program is agreed to by the institution and borrower.
          • Institutions may create modification programs to provide temporary relief for affected borrowers. The institution can presume that borrowers current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status. This would cover all loans in the modification program and would not require individual loan analysis.
          • Loans in a forbearance or deferral program are not considered past due and should not be reported as such during the deferral period. These loans should continue to accrue interest.
          • Modification, forbearance, or deferral programs that are mandated by the federal or state governments relating to COVID-19,  are not in the scope of FASB ASC 310-40.
          • Loans restructured in accordance with the statement will continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.
          • If the specific conditions of the Interagency Statement are met, such guidance overrides the current FASB ASC 310-40 guidance for determining whether a loan modification qualifies as a TDR.

If your institution needs assistance with creating a modification program to help your customers or help with any issues relating to the COVID-19, contact Larry Brown of VonLehman's Financial Institutions Group today at lbrown@vlcpa.com or 800.887.0437