Not since the financial crisis have lenders been faced with a tidal wave of potential defaults and delinquencies. With the U.S. operating under a presidentially declared emergency since March 13, regulators and lawmakers have acknowledged that the pandemic is causing a disruption to financial markets and the economy as a whole and are supportive of lenders working with borrowers that may have trouble meeting their contractual obligations due to the effects of the pandemic. With that in mind, the Federal Reserve and other regulators first announced that short-term modifications offered to such borrowers will not have to be booked as TDRs. Congress followed-up with the passage of the CARES Act, which among other things, permits lenders to suspend regulatory determinations with respect to loan modifications that would otherwise be tagged as TDRs. This is consistent with the relief offered by the regulators. The suspension runs from March 1, 2020 through 60 days after the end of the national emergency (or December 1, 2020, whichever occurs earlier).

Absent the extraordinary and unprecedented circumstances that we find ourselves in now, a TDR would occur if a borrower that is experiencing financial difficulty is granted a debt restructuring (typically in the form of a concession or modification) by its lender due to the financial difficulty. From an accounting standpoint, a TDR determination by a lender can be extremely difficult and complex. Performing TDR analysis for COVID-19 related modifications would put a lot of strain on a financial institution’s resources in the current business environment, especially at a time when resources and time are already stretched thin.

The consequences of a TDR can be far-reaching as well. A modification that is classified as a TDR is considered a TDR for as long as the lender holds the loan. The TDR guidance is critical in the current economic climate as they are subject to additional regulatory reporting and accounting requirements that are viewed as burdensome to both the lender and the borrower. By offering this guidance and passing the CARES Act, federal regulators and lawmakers are signaling that they want lenders to work with their borrowers without fear of regulator scrutiny down the road.

The guidance from regulators and the recent legislation allow lenders to be proactive and accommodating with many of their borrowers who find themselves in difficult financial positions due to the effects of COVID-19. While some industries and businesses will thrive in the current environment, most find themselves – seemingly overnight – adversely affected, which is why the guidance from the regulators is so important at this time. It helps lenders who, on the one hand, want to be accommodating during this difficult period but, on the other hand, may not have the institutional resources available (with so many employees working remotely or on reduced schedules) to provide any such accommodation if the ultimate result would lead to regulator criticism.  

Notwithstanding this current guidance, lenders should be aware that while a prudent loan modification or concession granted today (or in the near term) may fall within the parameters of the guidance, future modifications and concessions could potentially be TDRs if offered or granted after the statutory period expires. Lenders should also stay current on any future legislation that may affect TDR rules. Certainly, some loans will eventually end up being classified as TDRs after the statutory period discussed in this alert has expired. Further, the CARES Act clarifies that the suspension of a TDR determination will not apply if the modification is caused by an adverse impact unrelated to COVID-19. To that end, it is imperative for lenders to continue to analyze any future modification or concession using their same internal policies and procedures to avoid any issues with future TDR determinations or reporting requirements once the regular requirements are back in effect.