Federal banking regulators took a bold, first step this past Sunday, announcing Interagency Guidance (“the Guidance”) to encourage lenders to work with borrowers impacted by the COVID-19 outbreak.[1] The Guidance specifically permits lenders to enter into (prudent, of course) short-term loan modifications with borrowers who are otherwise current on their loans, without classifying the loan as a “troubled debt restructure” (TDR) or placing the loan into nonaccrual status. This allows lenders to provide immediate relief to borrowers facing unexpected distress because of COVID-19 with a reduced financial impact to their balance sheets.
The Guidance provides some details about what kinds of modifications qualify for this favorable accounting treatment:
- The modification must be short-term (e.g., six (6) months or less);
- The modification must be made on a good faith basis in response to COVID-19;
- The loan must be “current” (less than 30 days past due) when the modification program is implemented;
- The modifications can include:
- Payment deferrals;
- Fee waivers;
- Extensions of repayment terms;
- Other delays in payment that are “insignificant”; and
- The modification must be prudent, and consistent with safe and sound banking principles.
Under the Guidance, lenders “may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.”
Once a loan is modified under the Guidance, if a borrower complies with the new payment schedule, the loan will not be reportable as past due. Similarly, loans that perform in accordance with their short-term COVID-19 modifications generally should not be reported as nonaccrual. Nonaccrual reporting would, however, become required if the lender learns information that indicates that specific loans may not be repaid.
While not a comprehensive solution to the economic turbulence already swirling (much less the economic challenges expected to follow), this prompt regulatory action should create some interim relief for unsuspecting borrowers who find themselves unable to meet their loan obligations because of COVID-19. There will undoubtedly be more federal guidance as this situation unfolds, but lenders wanting to work with good borrowers in immediate need of short-term relief can already do so a little more freely than before.
For more information about ongoing developments related to COVID-19, visit Miller Nash Graham & Dunn’s resource library.
[1] The Guidance was jointly issued by 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), the Consumer Financial Protection Bureau (CFPB), and the State Banking Regulators.