Feds, States Offer Guidance on Loan Modifications

COVID-19 Update

Aiming to encourage financial institutions to accommodate borrowers affected by COVID-19, federal and state regulators issued an interagency statement on loan modifications.

The statement recognized the “unique and evolving” situation at hand that is posing challenges for banks, credit unions, businesses, borrowers and the economy.

What happened

In a joint Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the Board of Governors of the Federal Reserve System, 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 (CSBS) encouraged financial institutions to work “prudently” with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.

“The agencies view loan modification programs as positive actions that can mitigate adverse affects [sic] on borrowers due to COVID-19,” the statement said. “The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).”

Proactive actions to mitigate credit risk, consistent with safe and sound banking practices, are acceptable to the regulators, they explained, an approach that is consistent with long-standing practice in times of natural disaster and other extreme events.

The regulators emphasized that modifications of loan terms do not automatically result in TDRs. For example, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good faith basis due to COVID-19 for borrowers who were current prior to any relief do not constitute TDRs, the regulators said.

“This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant,” the interagency statement explained. “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.”

Examiners will exercise judgment in reviewing loan modifications, the regulators added, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs, refraining from criticizing “prudent efforts” by financial institutions to modify the terms on existing loans to affected customers.

In addition, the Federal Reserve Board, FDIC and OCC said that efforts to work with borrowers of one- to four-family residential mortgages, where the loans are prudently underwritten and not past due or carried in nonaccrual status, will not result in the loans being considered restructured or modified for the purposes of their respective risk-based capital rules.

With respect to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral, the regulators said. As for nonaccrual status and charge-offs, financial institutions should refer to the applicable regulatory reporting instructions as well as their own internal accounting policies to make a determination.

To read the statement, click here.

Why it matters

The federal and state regulators are sending a very clear message encouraging financial institutions to work with borrowers who are unable to meet their contractual payment obligations due to COVID-19 while promising not to criticize banks for their efforts. The agencies also noted that as the situation unfolds, additional communications—through statements, webinars, frequently asked questions and other means—will be shared with financial institutions.

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