Federal Agencies Issue Guidance on Loan Modifications Relating to COVID-19

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On March 22, 2020, in response to the growing anticipation for loan modifications necessitated by the implications of the Coronavirus Disease 2019 (“COVID-19”), the Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau and State Banking Regulators (collectively, the “Agencies”) issued an interagency statement entitled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Statement”) containing permissive, but not mandatory, guidance. The Agencies are encouraging (but not directing) financial institutions to work “prudently” with borrowers who may be unable to meet their payment obligations because of the effects of COVID-19. The Agencies consider such actions to be in the best interest of institutions, their borrowers and the economy.

While U.S. GAAP generally requires that financial institutions categorize as a troubled debt restructuring (a “TDR”) a debt restructuring which grants concessions to a borrower based on a borrower’s financial difficulties, the Agencies will generally not direct financial institutions to categorize certain short term modifications made on a good faith basis in response to COVID-19 as TDR’s. Payment deferrals, fee waivers, extensions of repayment terms and other delays in payments that are “insignificant,” when granted to borrowers that were current on their obligations before the effects of COVID-19 (i.e., less than 30 days past due at the time a modification is implemented) are modifications that will generally not be deemed TDR’s.

The Agencies have also indicated that (i) financial institutions are not expected to designate loans with COVID-19-related deferrals as past due simply because of such deferral, (ii) during the short-term arrangements described in the Statement, financial institutions should generally not report loans with deferred payments as “nonaccrual,” and (iii) loans that have been restructured as described in the Statement will continue to be eligible as collateral at the Federal Reserve’s discount window based on the usual criteria.

 

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