As you already know, the president declared a National Emergency on March 13, 2020 due to the COVID-19 pandemic. Even after several months, this remains a unique and challenging situation that continues to cause business disruptions affecting banks, borrowers, and the economy alike. As a recap, here are some of the more major changes impacting the lending environment which are still important as we strive to move forward.
When confusion and uncertainty erupted in full force due to many individuals and businesses also undergoing financial hardship, a bit of good news arrived for financial institutions. On March 22, 2020, the FDIC released an Interagency Statement (FIL-22-2020) regarding loan modifications made by financial institutions working with customers who are affected by the pandemic and are therefore unable to make contractual loan payments. As such, financial institutions will not be criticized for assisting borrowers during natural disasters or other extreme events as long as it is done through safe and sound practices. In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law by President Trump with bipartisan support as a way to provide financial relief to families and businesses due to the economic hardships caused by COVID-19. On April 7, 2020, a revised interagency statement was issued to provide further information regarding loan modifications as well as clarification with respect to the March 22 Interagency Statement and the CARES Act.
Under the CARES Act, a financial institution may provide a modification for an eligible loan to borrowers affected by COVID-19 without risk of being criticized for prudent efforts. Section 4013 under the Act allows financial institutions the ability to temporarily suspend certain requirements regarding Trouble Debt Restructurings (“TDR”) in order to account for financial issues caused by the pandemic. If not eligible under 4013 or if the financial institution decides not to accept the modification under 4013, it may be determined that the modification is not a TDR as per Accounting Standards Codification (“ASC”) 310-40.
In order for a modification to not be considered a TDR, the modification cannot be longer than six months for borrowers that are less than 30 days past due at the time the modification to the loan is put into place, as confirmed by the Financial Accounting Standards Board (“FASB”). Since it can be presumed that borrowers who are current on loan payments are not having any financial difficulties, such loans would not be designated as TDR loans and would not require any further TDR analysis.
In order to be an eligible loan under Section 4013 of the Act, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was no 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). Per this interagency guidance, loans eligible under Section 4013 are not required to be analyzed as a TDR under ASC 310-40. The agencies are considering to start collecting the current outstanding number and the dollar amount of section 4013 loans. Therefore, financial institutions should maintain a record of the volume of Section 4013 loans.
For reporting purposes, the FDIC Interagency Statement further mandates that loans which are in their deferral period or modified due to COVID-19 should not be reported as past due or non-accrual loans. Financial institutions should refer to their internal accounting policies as well as the applicable regulatory reporting instructions to identify whether loans due to stressed borrowers should be reported as non-accrual loans in regulatory reports.
Yvonna Coyne, CCBCO
Manager, Lending Audit Team
Yvonna Coyne is a seasoned loan operations and compliance professional with over 20 years of experience in the banking industry. Ms. Coyne supervises the Firm’s Lending Audit Team and is involved in all aspects of lending audits, including developing and updating audit scopes for lending reviews (residential, commercial and industrial, construction, SBA, etc.), planning, coordination and scheduling, managing staff, onsite fieldwork, training, and creating customized lending programs. Prior to joining acxell, she held management positions at several financial institutions in New Jersey. Ms. Coyne is a Certified Community Bank Compliance Officer (CCBCO) and a graduate of Kean University, where she earned a Bachelor of Science degree in Business Administration.