Moving beyond encouragement: Easing the complexity of granting short-term COVID-19 loan relief
March 24, 2020
By: Mark A. Mangano
The financial services regulators have moved significantly beyond encouraging financial institutions to work with loan customers affected by the Coronavirus 2019 Pandemic (COVID-19). On March 22, 2020, the federal financial services regulatory agencies and the Conference of State Bank Supervisors issued “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the Statement).1
Some of the agencies had previously issued statements encouraging loan modifications and other lending relief to customers affect by COVID-19.2 The statements suggested that “Prudent efforts to modify the terms on existing loans for affected customers … will not be subject to examiner criticism.” However, the statements offered no relief from the troubled debt restructuring (TDR) analysis required for reporting under Generally Accepted Accounting Principles (GAAP).3
Substantial regulatory relief
The Statement provides six very significant forms of regulatory relief:
- The agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.
- Short-term modifications made on a good faith basis in response to COVID-19 for borrowers who were delinquent less than 30 days prior to any relief are not TDRs for both GAAP and regulatory reporting.
- Modifications or deferral programs mandated by federal or state governments related to COVID-19 would not be in the scope of ASC 310-40.
- Loans with COVID-19 related payment deferrals will not be reported as past due unless the loan was past due for reasons unrelated to the deferrals.
- Loans with COVID-19 related short-term modifications should not be reported as non-accrual solely due to the modifications.
- One-to-four family residential mortgages not past due or carried in nonaccrual status prior to modification will not be considered restructured or modified for the purposes of their respective risk-based capital rules.
The Statement provides a clear statement of how short-term modifications related to COVID-19 will be treated for classification by examiners and reporting on regulatory reports and financial statements. This greatly reduces the regulatory and balance sheet risk of working with customers to address the sudden and unprecedented economic disruption caused by COVID-19.
Secure the benefit of the relief
The Statement presents the opportunity for much needed regulatory relief. There are three actions you should take to secure the benefit of the relief. Create policies and procedures, document your decisions, and track COVID-19 modified loans.
Policies and Procedures
The Statement suggests that some of the regulatory relief is dependent upon prudent decision making. Financial institutions should adopt policy statements that articulate the types of relief to be offered, define the circumstances under which loan relief will be offered, and explain how the relief is consistent with assisting customers and benefiting the financial institution. Procedures and lending documents should ensure consistent application of the policy goals.
Document your decisions
The regulatory relief described in the Statement is limited to loan risk mitigation strategies related to customers impacted by COVID-19. It will be essential to demonstrate that the financial institution was acting in response to a COVID-19 issue.
Track COVID-19 Loan Modifications
The Statement offers alternative treatment of COVID-19 related loan modifications. A separate class of COVID-19 modified loans will be created receiving different regulatory and accounting treatment. Separate tacking of COVID-19 modified loans and other modified loans will be necessary to distinguish the classes.
2 FIL-17-2020 Regulatory Relief Working with Customers Affected by the Coronavirus https://www.fdic.gov/news/news/financial/2020/fil20017.html; FIL-19-2020 Frequently Asked Questions for Financial Institutions and Customers Affected by the Coronavirus https://www.fdic.gov/news/news/financial/2020/fil20018.pdf
3 TDR accounting is governed by Accounting Standards Codification Subtopic 310-40-Troubled Debt Restructurings by Creditors (ASC 310-40).