Borrowers Impacted by COVID-19: Banking Regulators Provide Some Relief for Banks

Kirsten Spira | 03.23.20

On March 22, the Federal Reserve, OCC, CFPB, NCUA and State Banking Regulators issued an ​“Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” The regulators recognize that the COVID-19 outbreak will adversely impact banks and their borrowers, and have taken steps designed to help relieve these impacts. The regulators recognize that more agency action may be needed as the situation evolves.

The regulators believe that this approach is consistent with the longstanding regulatory practice of encouraging banks to assist borrowers in times of natural disaster and other extreme events.

Here are some of the core provisions of the Interagency Statement:

1. Working with Borrowers. The regulators: 
   1. Encourage banks to work prudently and proactively with borrowers who are unable to meet loan payments because of the effects of COVID-19. 
   2. View loan modification programs for these borrowers as ​“positive.”
   3. Will not direct banks to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).
   4. Will not criticize banks that mitigate credit risk through prudent actions consistent with safe and sound practices. [Obviously, determining what is ​“prudent action consistent with safe and sound practices” is language that creates risk for a bank] 
   5. Will not criticize banks that work with these borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan. 
2. Accounting for Loan Modifications:
   1. Modifications of loan terms do not automatically result in TDRs. 
   2. FASB confirmed that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. 
      1. 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.
      2. Factors to be considered in making this determination (see ASC 310 – 40) are: 
         1. Is the amount of delayed restructured payments insignificant relative to the unpaid principal or collateral value of the debt, thereby resulting in an insignificant shortfall in the contractual amount due from the borrower, and 
         2. Is the delay in timing of the restructured payment period insignificant relative to the frequency of payments due under the debt, the debt’s original contractual maturity, or the debt’s original expected duration. 
   3. Borrowers considered current are those that are less than 30 days past due at the time a modification program is implemented. 
   4. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, banks 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 no further TDR analysis is required for each loan modification in the program. 
   5. Examiners will exercise judgment in reviewing loan modifications, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs. 
   6. Even if modifications result in loans that are considered TDRs or are adversely classified, examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers. 
   7. Efforts to work with borrowers of one-to-four family residential mortgages in accordance with the Interagency Statement, 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. Note that Fannie Mae and other agencies have also issued public statements on how financial institutions should deal with loan modifications. 

   The Interagency Statement also discusses past due reporting, non-accrual status, charge offs and discount window eligibility for loans that are restructured in accordance with the Interagency Statement. You can find the Interagency Statement here, and should read the Interagency Statement in its entirety. 

   Remember that deferrals and other modifications should be documented in writing to make sure there are no misunderstandings about the nature of the deferral or modification. 

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• Lending