In-Depth: Bank Regulatory COVID-19 Loan Guidance Takeaways
Supplement to Bank Regulatory COVID-19 Guidance – Takeaways On Working With Borrowers & TDRs (Barack Ferrazzano Client Alert, March 2020)
- Payment Accommodations. Regulators want banks to work with their customers, but in a prudent manner. Additionally, the FDIC acknowledges that the loan resolution process will be protracted. As part of this process, the FDIC is encouraging banks to extend maturity dates or add principal to balloon payments, but also follow consumer lending laws and regulations related to disclosures. Our takeaway is that any initial deferral or modification should be short‑term in nature (between 60 to 90 days) and that any maturity dates should only be extended until banks can fully and properly evaluate the borrower’s situation and properly document such extension, which may not be feasible during this initial period. Additionally, the FDIC suggests providing standard federal and state disclosures to consumer borrowers to avoid confusion.
- Documenting Your Loan Files. Even though there is an urgency to provide relief, the FDIC provides in the FAQs that banks should fully document prior payment status, current payment status, recovery plans, sources of repayment, additional advances on existing or new loans, and collateral values. Our takeaway is not to rush into any deferral or modification, and document them appropriately. Your bank should also review its disaster-related lending policies and ensure that your loan officers review and understand them, and implement the policies in connection with every modification or deferral. Also, to balance resources and ensure every modification or deferral is properly considered, implement documentation practices appropriate to the relief, with deferrals having more documentation than lesser forms of relief. To further balance resources, initial relief should be short-term in nature so that your bank has more time to engage in due diligence for extended or longer-term relief, should that be necessary.
- Troubled Debt Restructurings (TDR). TDR status is ultimately an accounting matter, and we suggest you work with your accounting professionals when determining if a loan deferral or modification is a TDR. Our takeaway is that banks should consider short‑term (60 to 90 days) payment deferrals or modifications, but should not lower interest rates. Permanently lowering interest rates now could result in permanent long-term adverse classification of a loan as a TDR, because the effects of COVID-19 on any particular borrower may not truly be known for several months, or even longer.
- In making that determination, you should be aware that the Interagency Statement provides:
- 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.
- 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.
- 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.
- For borrowers that are not current, the guidance is less precise. The Interagency Statement provides:
- The agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications result in loans that are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.
- In addition, in the FAQs, the FDIC clarified that:
- [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 and refers to Accounting Standards Code (ASC) 310-40 (formerly Financial Accounting Standards Board (FASB) Statement No. 15) and ASC 310-10-35 (formerly FASB Statement No. 114) for additional guidance.
- [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 and refers to Accounting Standards Code (ASC) 310-40 (formerly Financial Accounting Standards Board (FASB) Statement No. 15) and ASC 310-10-35 (formerly FASB Statement No. 114) for additional guidance.
- In making that determination, you should be aware that the Interagency Statement provides:
- Policies & Procedures That Did Not Change. The policies and procedures regarding the treatment of nonaccrual status, allowance for credit losses (ACL), allowance for loan and lease losses (ALLL), and charge‑offs have not changed. Our takeaway is that despite the number of borrowers seeking relief and the FDIC’s expectation that banks will provide some type of immediate response, banks should not make any long-term modifications that could irreversibly result in adverse classifications. Consistent with our previous points, any loan deferrals or modifications should only last for a short time, until banks can fully evaluate the long-term impact on borrowers.
