The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the Conference of State Bank Supervisors issued an Interagency Statement on March 22 urging regulated financial institutions to work with borrowers affected by COVID-19. The statement “encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19” and states that the agencies “view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19.”
Lenders and servicers are responding rapidly to implement temporary loss-mitigation policies to assist borrowers in these difficult times. However, it is critical that the industry receive clear guidance as to how regulators will view such measures. The statement provides limited guidance for institutions as to whether certain loan modifications must be classified as troubled debt restructurings (TDRs), with the attendant accounting and regulatory consequences.
In order for a loan modification to avoid classification as a TDR, it must meet three requirements:
- The loan must be current (defined as paid within 30 days of the last due date).
- The modification must be for a short term (the statement offers “six months” as an example).
- The modification must be “made on a good faith basis in response to COVID-19.”
The statement further indicates that “[t]he agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically risk rate credits that are affected by COVID-19, including those considered TDRs.” Accordingly, “agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.”
The statement also offers instructions regarding status reporting for loans where the repayment has been changed by a modification. If a loan is “not otherwise reportable as past due,” then it is not to be reported as past due because of a deferral granted due to COVID-19. Similarly, although the general instructions for deeming loans as nonaccrual assets continue to apply, a loan should not be reported as nonaccrual “during the short-term arrangements discussed in this statement.”
While the statement offers helpful guidance, it is not comprehensive and questions remain regarding how financial institutions should categorize and report loans modified due to COVID-19 issues – e.g., when the modification takes a form other than a short-term deferral of payment. Anticipating the need for further instructions, the agencies committed in the statement to “continue to communicate with the industry as this situation unfolds, including through additional statements, webinars, frequently asked questions, and other means, as appropriate.”