On March 22, the Board of Governors of the Federal Reserve System (“FRB”), Federal Deposit Insurance Corporation, National Credit Union Administration, Office of Comptroller of the Currency, Consumer Financial Protection Bureau, and the Conference of State Bank Supervisors (collectively, “the Agencies”) issued an interagency statement, available here, providing guidance for lenders on how to deal with loan modifications and reporting for consumers affected by the coronavirus (“COVID-19”) pandemic. The statement encourages lenders to work with borrowers in light of COVID-19, and stresses that the Agencies will not criticize lenders for mitigating credit risk with prudent actions.
The statement describes an agreement among the Agencies to ease restrictions that might normally apply to borrowers seeking loan modifications. Specifically, the statement directs financial institutions not to categorize all COVID-19-related loan modifications as troubled debt restructurings (“TDR”). A restructuring of 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. Short-term loan modifications (six months) for borrowers considered current (less than 30 days past due) made in good faith as a result of COVID-19 would not be considered TDRs, including payment deferrals, fee waivers, extensions of repayment terms, or other delays which are insignificant. As many businesses have shuttered for the time being, leaving many employees temporarily out-of-work, the Agencies’ statement seems to prioritize borrowers who already are past due.
The statement provides further guidance to financial institutions, instructing them to presume that borrowers who are current on their loans are not experiencing financial difficulty at the time of the modification for TDR purposes, though short-term modifications related to COVID-19 may still go forward, with no further TDR analysis required for each loan modification in the program. With some states also mandating the suspension of mortgage payments during the pandemic, modification or deferral programs mandated by federal or state governments would not qualify as TDRs. The Agencies note that efforts to work with borrowers who are not past-due or in nonaccrual status will not be considered restructured or modified for purposes of risk-based capital rules where the loans are prudently underwritten.
The statement also provides guidance as to credit reporting on past due accounts as a result of COVID-19. Financial institutions are not expected to report as past due any loan given a deferral as a result of COVID-19. As a loan’s payment date is governed by the loan documents, if a financial institution agrees to a deferral, it may result in no contractual payments being past due and will not be considered past due for credit reporting purposes during the deferral period.
The statement also provides instructions as to nonaccrual status for loans, instructing that financial institutions should defer to applicable regulatory reporting requirements and internal accounting policies to determine whether loans to stressed borrowers should be reported as nonaccrual assets in regulatory reports. But, during short-term arrangements, such as a deferral, the loans should not generally be reported as nonaccrual. Finally, the statement provides that loans that have been restructured with short-term arrangements due to COVID-19 will continue to be eligible as collateral based on the usual criteria from the FRB.
In sum, the Agencies seem to be prioritizing loans for borrowers who already were past due and encouraging financial institutions to work with such borrowers with relaxed scrutiny for any arrangements made. The statement explicitly exempts loans that are considered current from the relaxed scrutiny given to TDRs. Financial institutions should accordingly continue to work with past due borrowers in a manner that is consistent with this guidance, while respecting the effect that COVID-19 is having on current borrowers.