On March 22, 2020, the FDIC, FRB, OCC, NCUA, CFPB and the state banking regulators (“Regulators”) issued an Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus (the “Statement”). The Statement encourages financial institutions to work constructively with borrowers impacted by the Coronavirus Disease 2019 (or “COVID-19”) and provides information for financial institutions regarding loan modifications.
Specifically, the Statement provides that Regulators will not criticize financial institutions for working constructively in a safe and sound manner with borrowers affected by COVID-19. The Regulators view prudent loan modification programs offered to borrowers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk.
The Statement reminds institutions that not all modifications of loan terms result in a troubled debt restructuring (“TDR”). Particularly, it reminds 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. Such short term modification include, for example, six months modifications that include payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
The Regulators also affirmed that they will not direct supervised institutions to automatically categorize loan modifications as TDRs. Importantly, the Regulators assured institutions that examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected, including those considered TDRs. Moreover, regardless of whether modifications are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify terms on existing loans for affected borrowers.
Additionally, the Statement provides Regulators’ views on reporting of past due and nonaccrual status for loan modification programs. Notably it reminds institutions that loans with agreed payment deferrals are not considered past due during deferral period and that, in general, loans with short term modifications discussed in the Statement should not be reported as nonaccrual (unless there is specific information showing that the loan will not be repaid).
Finally, the Statement reminds institutions that loans that have been restructured as described under the statement will continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.
Takeaways
The Statement shows that Regulators understand that financial institutions experience the effect of COVID-19 through borrowers’ requests for payment deferrals and in reduction in collateral values securing loans. The Statement encourages financial institutions to address these challenges by taking temporary measures rather than permanent ones. Short term measures, such as temporary forbearance and modification not only have a positive effect on the immediate financial conditions of customers, they also can also have positive effect on the institution long term financial stability and reputation. Institutions should consider creating plans for short terms measures in response to assistance requests from borrowers or in reaction to diminishing collateral values. In developing such plans, institutions are urged to consider this Statement and recent guidance provided by their regulators in response to COVID-19. Such plans should also ensure that they are treating customers on a consistent basis and without discrimination.
Institutions having questions concerning regulatory guidance relevant to COVID-19 or need assistance in developing short term plans consistent with regulatory guidance, please contact Solomon Maman.
Author
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Solomon has nearly two decades of experience representing financial institutions, real estate investors and privately owned business entities. Solomon concentrates his practice in the areas of banking, consumer financial services, real estate, business law and related litigation and appellate practice.
