FBLG Banking Letter - Special Edition Regarding Loan Modifications Related to COVID-19

COVID-19: Loan Modifications and Reporting for Financial Institutions

By Daniel R. McDonald

The world has been impacted by the Coronavirus Disease 2019 (COVID-19) in an unimaginable way. Since the first case was reported in the US on January 20, 2020, in Snohomish County, Washington, people have been forced to change daily habits affecting not only social activities but primarily the country's economy. The President declared a state of emergency on March 13, 2020, which resulted in business disruptions and other challenges that affect many financial institutions.

On March 22, 2020, the FDIC, together with several other agencies, issued an Interagency Statement addressing the COVID-19 and the effects on Financial Institutions. The document emphasizes the need to work with borrowers that have been or may be affected by the pandemic. 

The topics discussed are:

  • Concerns regarding the inability of customers to meet their financial obligations due to COVID-19. Banks are being bombarded with requests to extend/defer loan payments, and lenders are wondering how those modifications should be treated. 
  • It is made very clear throughout the statement that agencies will not criticize institutions for working with borrowers and that they will not require institutions to recognize COVID-19 related loan modifications as troubled debt restructurings (TDRs). 
  • The agencies state that prudent short-term modifications performed as a result of the COVID-19 to borrowers who were current (less than 30 days past due) prior to any relief are not TDRs.
  • If an institution agrees to a payment deferral, this may result in no contractual payments being past due. Therefore the loan is not considered past due during the period of the deferral.
  • Non-accrual status and charge-offs are also addressed. During the short-term modifications generally, those loans should not be reported as non-accrual.
  • Prudent short-term modifications performed as a result of the COVID-19 are viewed as positive actions that can effectively manage or mitigate adverse impacts on borrowers and lead to improved loan performance.

 It is encouraged in the statement that financial institutions maintain proper documentation that shows the borrower's payment status prior to being affected by COVID-19. The documentation should also include the borrowers' recovery plans, sources of repayment, additional advances on existing new loans, and the value of the collateral. Financial institutions should prepare a document similar to a problem loan report used for classified credits. The report should be updated as new information becomes available.

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