COVID-19 and Accounting for Loan Modifications
We break down the interagency statement on loan modifications and reporting for financial institutions working with customers affected by the coronavirus.
On March 13, 2020, the President of the United States declared a National Emergency due to the large-scale heath crisis caused by the coronavirus disease 2019 (also referred to as COVID-19) pandemic. The pandemic has caused significant business disruptions with severe economic consequences for businesses and society. Financial institutions have also been adversely affected by an increased risk of borrower default due to the severe financial stress caused by a sudden and sharp contraction of economic activity.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act:
- Creates a forbearance program for federally backed mortgage loans
- Protects borrowers from adverse credit reporting for loan accommodations related to the National Emergency
- Provides financial institutions the option to temporarily defer certain requirements under U.S. generally accepted accounting principles (GAAP) related to troubled loan assets
On April 7, 2020, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) (hereafter, “the agencies”) issued a revised interagency statement to provide additional information to financial institutions working with borrowers affected by COVID-19.
The revised interagency statement allows financial institutions to work collaboratively and constructively with borrowers and make appropriate risk-based loan modifications to assist the borrowers adversely impacted by the COVID-19 National Emergency and who therefore are unable to meet their contractual loan-payment obligations. The regulatory agencies have indicated that they will not criticize financial institutions for their good-faith efforts to make loan accommodations that afford borrowers temporary relief from loan-servicing requirements as long as they are done in a prudent, safe, and sound manner and in line with consumer-protection considerations. The agencies believe that positive and proactive measures will help the financial institutions mitigate short-term adverse effects on borrowers while leading to improved long-term loan performance and reduced credit risk.
Accounting and Reporting Considerations
The statement clarifies the interaction with the temporary relief provided by section 4013 of the CARES Act, Temporary Relief from Troubled Debt Restructurings (section 4013), which allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). Furthermore, the statement provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital.
Loan modifications eligible for accounting under section 4013 of the CARES Act must have the following characteristics:
- Must be related to COVID-19
- Must be executed on a loan that was not more than 30 days past due on December 31, 2019
- Must be executed in the “applicable period” between March 1, 2020, and the earlier of
- 60 days after the termination of the National Emergency
- December 31, 2020
Financial institutions accounting for eligible loans under section 4013 are not required to apply ASC subtopic 310-40 to the section 4013 loans. Furthermore, eligible loans under section 4013 do not have to be reported as TDRs in regulatory reports and are not subject to determinations of impairment associated with TDRs such as interest rate concessions, payment deferrals, or loan extensions. However, financial institutions should maintain records of the volume of section 4013 loans that may be collected for supervisory purposes.
The statement also indicates that the agencies' examiners will not automatically adversely risk rate credits that are impacted by COVID-19 and will not criticize prudent efforts by financial institutions to modify the loan terms for affected customers.
Efforts to work with borrowers of one-to-four-family residential mortgages in accordance with the loan modification described above, 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.
For loans not otherwise reportable as past due, financial institutions are not required to designate section 4013 loans with deferrals as past due because of the deferral, as once a financial institution agrees to a payment deferral, this will result in no contractual payments being considered past due.
NONACCRUAL STATUS AND CHARGE-OFFS
During the short-term loan modification arrangements, affected loans generally should not be reported as nonaccrual. If more information becomes available indicating a specific loan will not be repaid, financial institutions should follow the charge-off guidance in the instructions for the Consolidated Reports of Condition and Income.
DISCOUNT WINDOW ELIGIBILITY
Loans that have been restructured as described under the statement will continue to be eligible as collateral at the FRB's discount window based on the usual criteria.
1. ASC Subtopic 310-40 Receivables - Troubled Debt Restructuring by Creditors (ASC Subtopic 310-40)