March 22, 2020
Authored by: Robert Klingler
On March 18, 2020, the FDIC issued guidance in its Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 indicating the potential for relief from the Troubled Debt Restructuring (TDR) reporting requirements.
Financial institutions should determine whether loans with payment accommodations made to borrowers affected by COVID-19 should separately be reported as TDRs in separate memoranda items for such loans in regulatory reports. A TDR is a loan restructuring in which an institution, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. However, a loan deferred, extended, or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not reported as a TDR.FDIC FAQ published March 18, 2020
While appreciated, that guidance left a lot of discretion to the regulators to second guess the interpretations by financial institutions and essentially just repeated existing guidance. On Sunday, March 22, 2020, the federal banking regulators collectively issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. This new Interagency Statement fortunately goes further.
Modifications of loan terms do not automatically result in TDRs. According to U.S. GAAP, a restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) 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. 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.
Working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who 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 TDR analysis is required for each loan modification in the program.Interagency Statement published March 22, 2020. Emphasis added.
While the initial language could to be read to suggests that only “payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment” are excluded from potential TDR treatment, the ultimate conclusion that “financial institutions may presume that borrowers that are current* on payments are not experiencing financial difficulties at the time of the modification” should make clear that any modifications, including adjustments to interest rates or other longer-term modifications should also avoid categorization as a TDR. (Elsewhere in the Interagency Statement, the regulators indicate that any borrower less than 30 days past due may be treated as current for these purposes.)
This clarification is welcome guidance from the banking regulators, particularly as timely action by banks to assist their customers is critical at this time. Bankers do not have the time, nor should they be expected to, run every potential loan modification by either their accountants or regulators. There still remains risk that the regulators “forget” this guidance in the course of the next on-site examination; sticking the 3-page Interagency Statement in each modified loan file should be entirely unnecessary, but may emphasize the intent of the bankers contemporaneously with the modification.
Addendum: The FASB has also issued its own statement confirming concurrence with the approach identified in the Interagency Statement.