A VIEW ON THE CARE ACT & INTERAGENCY STATEMENT BY US REGULATORY AGENCIES

The impact of the coronavirus is everywhere, including the regulatory reporting world. Aside from the challenges for institutions of making sure that filings are made accurately and on-time with more people working remotely than ever before, the regulatory agencies themselves have had to work to clarify the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and its interaction with Troubled Debt Restructurings (section 4013) as well as their views on consumer protection considerations.

The specific items the agencies focus on are as follows:

WORKING WITH CUSTOMERS:

The agencies encourage 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 effects on borrowers due to COVID-19.

• The agencies will not criticize institutions for working with borrowers in a safe and sound manner.
• Institutions generally do not need to categorize COVID-19-related modifications as Troubled Debt Restructurings (TDRs), and the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.
• The agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.
• The agencies also will not criticize institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.

ACCOUNTING AND REPORTING CONSIDERATIONS

As provided for under the CARES Act, a financial institution may account for an eligible loan modification either under section 4013 or in accordance with ASC Subtopic 310-40.

Accounting for Loan Modifications under Section 4013

To be an eligible loan under section 4013 (section 4013 loan), a loan modification must be:

1. related to COVID-19;
2. executed on a loan that was not more than 30 days past due as of December 31, 2019; and
3. executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020 (applicable period).

Financial institutions accounting for eligible loans under section 4013 are not required to apply ASC Subtopic 310-40 to the section 4013 loans for the term of the loan modification. Financial institutions do not have to report section 4013 loans as TDRs in regulatory reports.

Accounting for other Loan Modifications Not under Section 4013

There are circumstances in which a loan modification may not be eligible under Section 4013 or in which an institution elects not to apply Section 4013. For example, a loan that is modified after the end of the applicable period would not be eligible under Section 4013. For such loans, the guidance below applies.

Modifications of loan terms do not automatically result in TDRs.

The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB)9 that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40.

Accordingly, working with borrowers who are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19 generally would not be considered TDRs.

More specifically, financial institutions may presume that borrowers 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, if:

• The modification is in response to the National Emergency;
• The borrower was current on payments at the time the modification program is implemented; and
• The modification is short-term (e.g., six months).

Credit Risk

The agencies’ examiners will exercise judgment in reviewing loan modifications and will not automatically adversely risk rate credits that are affected by COVID-19. Regardless of whether modifications result in loans that are considered TDRs, section 4013 loans, or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.

Regulatory Capital

The FRB, the FDIC, and the OCC note that efforts to work with borrowers of one-to-four family residential mortgages as described above, where the loans are prudently underwritten, and not 90 days or more 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.

Past Due Reporting

With regard 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. If a financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral.

Nonaccrual Status and Charge-offs

During the short-term arrangements discussed in this statement, these loans generally should not be reported as nonaccrual. As more information becomes available indicating a specific loan will not be repaid, institutions should

DISCOUNT WINDOW ELIGIBILITY

Institutions are reminded that loans that have been restructured as described under this statement will generally continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.

CONSUMER PROTECTION REQUIREMENTS:

When working with borrowers, lenders and servicers should adhere to consumer protection requirements, including fair lending laws, to provide the opportunity for all borrowers to benefit from these arrangements. When exercising supervisory and enforcement responsibilities, the agencies will take into account the unique circumstances impacting borrowers and institutions resulting from the National Emergency.

Monitoring asset soundness is a task embedded in loan portfolio management but it’s more important now than before when the results of the relief measures taken remain fluid. VERMEG’s trend and variance analysis can assist in determining the direction and magnitude of changes to the credit exposure, and help guide management to establish a clear response.

If you would like to discuss any of the subjects covered above and how VERMEG can help please contact us at America@vermeg.com

PAUL BAIK
REGULATORY ENABLEMENT MANAGER – AMERICAS