The Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB) and Conference of State Bank Supervisors (from now on referred to as the Agencies) have issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Statement) to encourage institutions to work constructively with customers impacted by the Coronavirus (also referred to as COVID-19) and to provide additional guidance regarding loan modifications.
The Statement encourages institutions to be proactive and to work with borrowers prudently, and refers to loan modification programs as “positive actions.” Key elements of the Statement include:
- Encourages financial institutions to work constructively with borrowers impacted by COVID-19;
- Will not criticize institutions for prudent loan modifications and will not automatically categorize such modifications as troubled debt restructurings (TDRs);
- Confirms with the Financial Accounting Standards Board (FASB) that short-term modifications (e.g. 6 months) made on a good faith basis to borrowers not currently past due (i.e., defined as less than 30 days past due on their contractual payments at the time of modification) are not TDRs;
- Would not consider deferral of loan payments in such modifications to be “past due” and such loans would not generally be considered as “nonaccrual”; and
- Views prudent loan modification programs as positive actions that can effectively manage or mitigate adverse impacts on borrowers.
Additional guidance on the approach to accounting for loan modifications can be found on the FASB website.
So whether you are a financial institution seeking to effectively manage credit risk during this tumultuous time or a borrower seeking to maintain business operations during this unprecedented disruption, time is of the essence. Proactively communicating now, while the related credit is performing (not past due), is clearly to the benefit of both the borrower and lender during these uncertain times. For more guidance regarding impacts on your financial institution, be sure to reach out to your CRI advisor.