This article was updated on April 14, 2020.
On March 22, 2020, financial institution regulators released guidance for financial institutions and their customers in response to the COVID-19 pandemic titled Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. Specifically, the guidance provides new interpretations on the treatment of loan modifications. An overview of the guidance follows.
Concurrently, the Financial Accounting Standards Board (FASB) released a statement indicating that the interagency guidance was developed in consultation with the FASB staff. The FASB staff concur with the issued guidance and stand ready to assist stakeholders.
On April 7, 2020, the financial institution regulators released an update to the original guidance issued March 22. It incorporates the impact on the original guidance for the optional suspension of US generally accepted accounting principles (GAAP) related to troubled debt restructurings (TDRs) in the Coronavirus Aid, Relief, and Economic Security Act (HR 748), which is known as the CARES Act.
The key concepts and considerations in the original guidance remain effective in the updated guidance.
Key Provisions
The financial institution regulators understand that this unique and evolving situation could pose temporary business disruptions and challenges that affect banks, credit unions, businesses, borrowers, and the economy.
Working with Customers
The guidance encourages 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 guidance focuses on borrowers who were current at the time of the modification—meaning institutions will want to work quickly and proactively.
Accounting for Loan Modifications
The guidance doesn’t change the underlying accounting for the treatment of loan modifications and TDR classifications under Accounting Standards Codification (ASC) Subtopic 310-40, Troubled Debt Restructurings by Creditors. Instead, the guidance offers interpretation for the existing accounting method.
Short-term modifications made in response to COVID-19 to borrowers who are considered current won’t be considered TDRs. Borrowers are considered current if they’re less than 30 days past due at the time of the loan modification.
The guidance provides the following examples of short-term, meaning six months or less, modifications:
- Payment deferrals
- Fee waivers
- Extension of repayment terms
Creditworthy Borrowers
Institutions that modify loans to creditworthy borrowers—either individually or as part of a program to help borrowers impacted by COVID-19—can presume that borrowers current on payments aren’t experiencing financial difficulties, and as such, the loans don’t meet the TDR classification criteria.
The guidance clarifies that modification or deferral programs mandated by the federal or state government related to COVID-19 wouldn’t be within the scope of TDR accounting.
Considerations for Past-due Borrowers
It’s important to note the guidance doesn’t provide insight for borrowers who are past-due 30 or more days at the time of the modification.
These modifications will still need to be evaluated under the current framework for TDRs in GAAP, which requires a higher degree of subjectivity and analysis.
Past Due Reporting
The guidance also provides clarity on the treatment of loans not otherwise reportable as past due.
Financial institutions aren’t expected to designate loans with deferrals granted due to COVID-19 as past due solely because of the deferral.
Expectation of Additional Guidance
Additional information on this topic is expected, and we’ll provide additional insights as they become available.
We’re Here to Help
To learn more about the implications of the guidance or questions you may have about loan modification, contact your Moss Adams professional.