Authored by Andrew Cross

Federal and state bank regulators today issued an interagency statement to provide additional information to financial institutions (“FIs”) that are working with borrowers affected by the Coronavirus Disease 2019 (“COVID-19”).

This post will provide a bullet point summary of this statement.

  • Participating Agencies – The statement was issued by the following agencies:
    • The Board of Governors of the Federal Reserve System (the “FRB”);
    • The Federal Deposit Insurance Corporation (the “FDIC”);
    • The National Credit Union Administration (the “NCUA”);
    • The Office of Comptroller of the Currency (the “OCC”);
    • The Consumer Financial Protection Bureau; and
    • The Conference of State Bank Supervisors (i.e., the state banking regulators).
  • FIs Are Encouraged to Work with Borrowers – The agencies view loan modification programs as positive actions that can help borrowers.  Accordingly, FIs are encouraged to work prudently with borrowers that are or may be unable to meet loan payment obligations because of the effects of COVID-19.
  • Accounting for COVID-19 Loan Modifications – The agencies confirmed with the staff of the Financial Accounting Standards Board (FASB) 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 Troubled Debt Restructurings (TDRs).
    • FIs 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.  Accordingly, no further TDR analysis is required for each loan modification in a COVID-19 program.
    • Loan modification or deferral programs mandated by the federal or a state government related to COVID-19 would not be in the scope of the particular FASB accounting standard that applies to TDRs (Accounting Standards Codification Subtopic310-40, Receivables – Troubled Debt Restructurings by Creditors).
  • Specific Actions That Will Not be Criticized – The agencies specifically indicated that they will not criticize FIs for:
    • Mitigating credit risk through prudent actions consistent with safe and sound banking practices;
    • Working with borrowers as part of a risk mitigation strategy intended to improve an existing that is not considered to be in good standing; or
    • Undertaking prudent efforts to modify the terms on existing loans to COVID-19 affected customers regardless of whether those modifications result in loans that are considered TDRs or are adversely classified.
  • Past Due Reporting Not Required – The agencies do not expect FIs to designate loans deferred under a COVID-19 program as past due solely because of the deferral (i.e., the loans must not be otherwise reportable as past due) during the period of the deferral.  The agencies noted that this treatment also applies for risk-based capital purposes.
  • Treatment of 1-to-4 Family Mortgages Under Federal Risk-Based Capital Rules – The FRB, the FDIC, and the OCC indicated that one-to-four family residential mortgages will not be considered to be restructured or modified for the purposes of each agency’s respective risk-based capital rules, if the loans are (i) prudently underwritten, (ii) not past due or carried in non-accrual status, and (iii) qualified for modification under the FIs COVID-19 related deferral/modification program.  The NCUA agreed with the approach of these three federal agencies, although noted that its risk-based capital rule does not go into effect until January 1, 2022.
  • Nonaccrual Status and Charge-offs – Loans that are eligible for a short-term modification under a COVID-19 deferral program generally should not be reported as nonaccrual assets in regulatory reports.  An FI should refer to charge-off guidance in the instructions for the Consolidated Reports of Condition and Income (or, for federally insured credit unions, NCUA LCU 03-CU-01), if it learns of new information that indicates that a specific loan will not be repaid.
  • Discount Window Eligibility – Loans that have been restructured under the interagency statement will continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.

The full text of this statement is available here.

Finally, as a supplement to this interagency statement and as we mentioned in last week’s post, Payment Accommodations Under Commercial Loans by Banks to Borrowers: Remember the Interest Rate Hedge Documentation, as FIs work through COVID-19 issues, we remind clients, colleagues and contacts that a variable rate commercial loan and the related interest rate hedge are governed by two different legal contracts.

If changes are made to the loan documentation, then corresponding changes need to be made to any related interest rate hedge documentation.

Good evening.  Good relief, although remaining hopeful that FIs never have to rely on it all that much. DR2