Read the Interagency Statement on Working with Customer Affected by the Coronavirus (Revised) here

Treliant Takeaway:

Treliant knows loss mitigation and loan modifications.  If you need assistance with helping your borrowers, or determining the impact of this interagency statement on your firm’s activities, Treliant can help.

Article Highlights:

On April 7, 2020, the Board of Governors of the Federal Reserve System (FRB), the Consumer Financial Protection Bureau (CFPB). the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC, jointly Agencies), in consultation with state financial regulators,[1] revised the Interagency Statement on Working with Customers Affected by Coronavirus (Revised Statement). The Agencies revised the Revised Statement to clarify the interaction between the March 22, 2020, version of the Revised Statement and the Coronavirus Aid, Relief, and Economic Security Act (CARES). [2]  In addition, the Revised Statement provides the Agencies’ views on consumer protection considerations associated with loan modifications associated with COVID-19.

The Agencies encouraged financial institutions to work with affected borrowers, and noted that loan modification programs are positive actions that can mitigate adverse borrower effects of the pandemic and its fallout. As lenders work with borrowers, the Agencies note that they will not criticize lenders that mitigate credit risk through prudent actions consistent with safe and sound practices. Proactive loan modifications and loss mitigation activities are in the best interest of financial institutions and their borrowers.

Supervised institutions will not automatically be required to categorize all loan modifications related to COVID-19 as troubled debt restructurings (TDRs). Under CARES, lenders may account for an eligible loan under either §4013 of CARES or ASC Subtopic 310-40 (ASC 310-40). [3] 

Loan modifications eligible for treatment under §4013 of CARES (Section 4013 Loans) are not subject to ASC 310-40 and do not have to be reported as TDRs in regulatory reports. However, the lender should maintain records of loan modifications under §4013, which may be collected for supervisory purposes.  In addition, Section 4013 Loans must meet all of the following conditions:

  • The modification must be related to COVID-19.
  • The modified loan must not have been more than 30 days past due as of December 31, 2019.
  • The modification must be executed between March 1, 202 and the earlier of December 31, 2020 and 60 days after the termination of the National Emergency.

If the institution cannot, or elects not to, apply §4013, the lender should evaluate whether a loan is a TDR and account for the loan appropriately under ASC 310-40. The Agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis as a response to COVID-19 to borrowers who were current before any relief are not TDRs. Government-mandated modification or deferral programs are not within the scope of ASC 310-40. In addition, financial institutions may presume that the loan is not a TDR without further analysis if the loan meets the following conditions:

  • The modification is in response to the COVID-19 National Emergency;
  • The borrower is current or less than 30 days past due when the modification program is implemented; and
  • The modification short-term (e.g., six months).

The Agencies reiterated that their examiners will exercise judgment in reviewing modifications and will not automatically adversely rate loans that are modified as a result of COVID-19, and will not criticize prudent efforts to modify terms on existing loans to affected customers.  The federal prudential banking regulators (FRB, FDIC, and OCC) will not treat efforts to work with borrowers whose loans are secured by one-to-four family residential real estate will not be treated as restructured or modified for the purposes of risk-based capital rules as long as the loans were prudently underwritten and not past due or carried in nonaccrual status. If loans are not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals related to COVID-19 as past due solely because of the COVID-19 related deferrals.

Although each financial institution should follow its applicable regulatory reporting instructions and internal accounting policies to determine if loans to distressed borrowers should be reported as nonaccrual assets in regulatory reports, the Agencies generally believe loans given short-term deferrals such as the one discussed in the Interagency Statement should not be reported as nonaccrual. However, if more information become available indicating a specific loan will not be repaid, institutions should follow the charge-off guidance in the instructions for the Consolidated Reports of Condition and Income or NCUA 03-CU-01, as applicable.

The FRB reminds institutions that loans modified or restructured as described in the Interagency Statement will continue to be eligible as collateral for discount window borrowing, subject to the usual criteria.

Prudently working with borrowers can ease cash flow pressures on affected borrowers, improve consumer debt service capacity and home retention, and facilitate lender recoveries. The Agencies remind financial institutions to comply with all relevant consumer protection and fair lending requirements when working with borrowers. When exercising supervisory and enforcement responsibilities, the Agencies will consider the unique circumstances associated with the National Emergency; an institution’s good-faith efforts to comply with consumer protection laws. In general, supervisory feedback for institutions will be focused on issue identification, deficiency correction, and consumer remediation, rather than consumer compliance public enforcement actions if the circumstances were related to the National Emergency and that the institution made good faith efforts to support borrowers, comply with the consumer protection requirements, and make any required corrective actions or remediation.

[1] The state regulators include members of the Conference of State Bank Supervisors, the American Council of State Savings Supervisors, and the National Association of State Credit Union Supervisors.

[2] Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020).

[3] The TDR designation is an accounting categorization, as promulgated by the FASB and codified within Accounting Standards Codification (ASC) Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors (ASC 310-40).

Author

Lynn Woosley

Lynn Woosley is a Senior Director with Treliant.  She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.