Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus

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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 March 22, 2020, the Board of Governors of the Federal Reserve System (FRB), the Conference of State Bank Supervisors (CSBS), 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) issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Borrowers Affected by the Coronavirus (Interagency Statement). The Agencies recognize that the unique circumstances created by the pandemic and the state of emergency could result in temporary business disruptions or challenges for consumers, businesses, and financial institutions.

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 offer the following guidance:

  • The Agencies 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).[1] 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 (less than 30 days past due) before any relief are not TDRs. Short-term (six months or less) payment deferrals, fee waivers, repayment extensions, or other insignificant delays in payment offered to current borrowers are not TDRs.
  • Actions mandated by state or federal governments, such as a state program that suspends all mortgage payments for a period, are not within the scope of ASC 310-40.
  • Bank examiners will not automatically classify 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) note that modifications or 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 becomes 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.
  • Finally, the Agencies reminded 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.

For additional information on addressing issues related to COVID-19, please refer to the following:

[1] 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).