Bank Regulators Issue COVID-19 Guidance for TDRs

As the spread of COVID-19 is reaching a critical phase in the United States, it is having a significant impact on economic activity. The United States has been operating under a presidentially declared emergency order since March 13, 2020, which is causing disruptions in commerce and creating challenges affecting businesses, financial institutions and borrowers alike.

On April 7th, the FDIC, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency, the National Credit Union Administration, the Consumer Financial Protection Bureau and state banking regulators issued FDIC FIL-36-2020, “Revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus.” This statement revises and supersedes FDIC FIL-22-2020 issued on March 22, 2020.

The revised interagency statement provides that:

• Financial institutions are encouraged to work constructively with their customers on prudent loan modifications during these unprecedented times.
• Prudent loan modifications are viewed as positive actions that can effectively manage or mitigate adverse impacts on borrowers and lead to improved loan performance and reduced credit risk.
• The agencies will not criticize institutions for working with borrowers to mitigate credit risk in a “safe and sound manner” or for working with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.
• The agencies will not direct supervised institutions to automatically categorize COVID-19-related loan modifications as troubled debt restructurings (TDRs).

In addition, it provides supervisory views on past due and nonaccrual reporting of loan modification programs.

The revised interagency statement clarifies the interaction between the interagency statement and the optional temporary relief provided under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It also addresses accounting and reporting considerations under section 4013 of the CARES Act. Additionally, the statement shares supervisory views on consumer protection considerations.

To qualify as an eligible loan, the loan modification must be: (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency or (B) December 31, 2020 (applicable period). If a loan modification is not eligible under section 4013, or if the institution elects not to account for the loan modification under section 4013, the financial institution should evaluate whether the modified loan is a TDR.

Here are a few other accounting and reporting considerations included in the interagency statement:

• The agencies’ examiners will exercise judgment in reviewing loan modifications and will not automatically adversely risk rate credits that are affected by COVID-19.
• Modification efforts of one-to-four family residential mortgages where loans are prudently underwritten, and not 90 days or more past due or carried in nonaccrual status, will not result in loans being considered restructured or modified for the purpose of respective risk-based capital rules.
• Financial institutions are not expected to designate loans with deferrals granted due to COVID-19, that are not otherwise considered past-due, as past due because of the deferral.
• In general, COVID-19 related loan modifications should not be reported as nonaccrual. Each financial institution should refer to the applicable regulatory reporting instructions, as well as its internal accounting policies, to determine if loans to stressed borrowers should be reported as nonaccrual assets in regulatory reports.
• COVID-19-related loan modifications will generally continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.

Lastly, the interagency statement addresses the supervisory views on consumer protection considerations.  When working with borrowers, lenders and servicers should adhere to consumer protection requirements, including fair lending laws, to provide the opportunity for all borrowers to benefit from these arrangements.

The interagency statement includes frequently asked questions for financial institutions affected by COVID-19 that address certain questions related to working with borrowers, operational issues, Community Reinvestment Act, and the Bank Secrecy Act.

Contact me or another member of Kaufman Rossin’s risk advisory services team to learn more about how this new guidance may impact your financial institution.