On March 22, 2020, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (the NCUA), the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau and various state banking regulators (collectively, the Agencies) issued an interagency statement (the Statement) to provide additional information to financial institutions that are working with borrowers affected by COVID-19.
TDRs and non-pass loans
Among other things, the Statement provides that the Agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19-related loan modifications as troubled debt restructurings (TDRs). The Statement also provides that the Agencies will not criticize financial institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.
Accounting for loan modifications
The Statement discloses that the Agencies have confirmed with staff of the Financial Accounting Standards Board that short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.
The Statement further provides that working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers that are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status and thus no further analysis is required for each loan modification in the program. Modification or deferral programs mandated by the federal or a state government related to COVID-19 would not be in the scope of ASC 310-40, e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period.
The Statement indicates that the Agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk-rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications result in loans that are considered TDRs or are adversely classified, the Agencies’ examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.
In addition, the Statement provided that the FRB, FDIC and OCC noted that efforts to work with borrowers of one-to-four-family residential mortgages as described in the modification section of the document, where the loans are prudently underwritten and not past due or carried in nonaccrual status, will not result in the loans being considered restructured or modified for the purposes of their respective risk-based capital rules.
The Statement provides that with regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. If a financial institution agrees to a payment deferral, this may result in contractual payments being past due, and these loans are not to be considered past due during the period of the deferral.
Nonaccrual status and charge-offs
The Statement provides that during the short-term arrangements discussed above, affected loans generally should not be reported as nonaccrual. As more information becomes available indicating a specific loan will not be repaid, institutions should refer to the charge-off guidance in the instructions for the Consolidated Reports of Condition and Income.
Discount window eligibility
The Statement reminds institutions that loans that have been restructured as described under the Statement will continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.
The full text of the statement can be found here.