United States: COVID-19: When A Bank Loan Restructure May Not Be A Troubled Debt Restructuring

On March 22, 2020, the Federal banking and credit union regulators (FRB, FDIC, NCUA, OCC and CFPB) (collectively, the "Agencies"), along with the Conference of State Bank Supervisors published an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (the "Statement") discussing the appropriate accounting and reporting for Coronavirus Disease 2019 ("COVID-19") related loan restructurings. The Statement encourages banks to work with their customers to resolve pandemic-related issues, characterizing such workouts as "positive actions." In addition, it provides a restructuring roadmap for banks and credit agencies that decide to work with customers on issues related to the pandemic. As provided in the Statement,

"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." (Emphasis added) ...

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. (Emphasis added) ...

In addition, the FRB, the FDIC, and the OCC note that efforts to work with borrowers of one-to-four family residential mortgages as described in the modification section of [the 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."

Thus, the Agencies are indicating that properly documented COVID-19 related modifications are not required to be, and should not be, designated as a TDR. Further, loans modified under such a program would not change the risk based capital requirements of the bank (Credit unions start working with Risk Based Capital rules in 2021).

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