Federal and State Regulators’ Guidance on COVID-19 Loan Modifications
On Sunday evening, March 22, 2020, the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Consumer Financial Protection Bureau (CFPB), National Credit Union Administration (NCUA) and Conference of State Bank Supervisors (CSBS) (collectively, Regulators) issued an interagency statement encouraging financial institutions to work with borrowers affected by COVID-19 and clarifying the treatment of loan modifications. As discussed below, this interagency statement provides assurance that financial institutions need not categorize such short-term loan modifications as troubled debt restructurings (TDRs) and that bank examiners will be flexible in approving loan modifications. The interagency statement is an important component of Regulators’ continuing response to the pandemic, on which we will continue to report. We also briefly discuss below certain other significant COVID-19 forbearance measures adopted by federal and state authorities in the past week.
The Financial Accounting Standards Board (FASB) has confirmed that short-term loan modifications, whether granted individually or as part of a program, to borrowers who were current (i.e., less than 30 days past due) prior to such relief are not TDRs. Examples include short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms and other insignificant payment delays. In accordance with Accounting Standards Codification (ASC) Subtopic 310-40, creditors may consider factors such as whether the amount of delayed restructured payments is insignificant relative to the unpaid principal or collateral value of the debt, thus resulting in an insignificant shortfall in the amount due, and whether the delayed timing of the restructured payment period is insignificant relative to the frequency of payments due, the debt’s original contractual maturity, or the original expected duration. Modification or deferral programs mandated by federal or state government also would not be deemed TDRs.
Financial institutions need not report as past due loans with deferrals granted to borrowers affected by COVID-19. They also generally should not classify these loans as nonaccrual assets in regulatory reports (although we advise consulting internal accounting policies and applicable regulatory reporting instructions to confirm). Institutions should refer to the charge-off guidance under the Consolidated Reports of Condition and Income, however, once it appears that a specific loan will not be repaid.
Bank examiners will “exercise judgment” in reviewing loan modifications, and will not automatically adversely risk rate the affected credits, including TDRs. Moreover, even if the modifications are considered TDRs or are adversely classified, examiners will not criticize prudent loan modifications made to manage or mitigate COVID-19 impacts on borrowers.
In addition, the FRB, FDIC and OCC note that loan modifications of the type discussed in this interagency statement for borrowers of one-to-four family residential mortgages – if prudently underwritten, and not past due or carried in nonaccrual status – will not be considered restructured or modified under risk-based capital rules. Loans restructured under this interagency statement will continue to be eligible as collateral at the FRB’s discount window, and the FRB encourages banks to use the window to continue lending.
This interagency statement follows other relief measures such as the FRB’s statement that financial institutions can get Community Reinvestment Act (CRA) credit for waiving late payment fees, increasing credit limits, etc., to help consumers affected by COVID-19. Following an announcement earlier this month that it would permit mortgage payments to be suspended for up to 12 months due to hardship considerations, the Federal Housing Finance Agency (FHFA), together with the Department of Housing and Urban Development (HUD), also announced last week a foreclosure and eviction moratorium for all single-family mortgages backed by FHFA, Fannie Mae or Freddie Mac for at least 60 days. States including New York and Massachusetts and cities including Los Angeles, Boston and Seattle also have announced moratoriums on evictions.
We foresee more mandates similar to New York Governor Andrew Cuomo’s March 21, 2020, Executive Order, which prohibits banks’ denial of forbearance to persons and businesses suffering financial hardship from COVID-19 for 90 days, and directs the New York Department of Financial Services to adopt emergency regulations to require banks to make mortgage forbearance applications widely available and to restrict ATM, overdraft and credit card late fees.
We will report on Regulators’ continuing guidance to the industry. Next month, we will hold a webinar to discuss debt collection issues and Regulators’ guidance, as these issues reach a critical stage. Our Financial Services Litigation Regulatory and Enforcement team stand ready to answer your questions and help limit your institutions’ liability exposure and economic impact from the COVID-19 turmoil.
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