On March 22, 2020, the FDIC, Federal Reserve Board, Office of the Comptroller of Currency, the National Credit Union Administration, and state regulatory bodies published an interagency statement clarifying the identification and recognition of troubled debt restructurings (TDRs) related to COVID-19. The Financial Accounting Standards Board (FASB) followed with a press release, stating it was consulted in the development of the guidance and concurs with the approach outlined.
Summarized key aspects of the statement are as follows:
- The requirement to identify TDRs isn’t waived; however, the interagency statement provides additional factors to consider in response to COVID-19.
- Financial institutions may presume borrowers aren’t experiencing financial difficulties at the time of modification, and therefore the modification isn’t a TDR, if:
- The borrower is current. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a “modification program is implemented.”
- The modification is intended as temporary relief for current borrowers affected by COVID-19.
- The concept of “temporary relief” is important in the decision-making analysis for determining if restructuring of a loan is considered a TDR. Below are examples of potential “temporary relief items” noted in the guidance issued:
- Short-term modifications including payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. In certain circumstances, these modifications could be up to six months in duration and qualify as “short term.”
- The statement doesn’t address principal forgiveness; the conclusion would be that principal forgiveness would still be assumed to trigger TDR status.
- Modifications or deferral programs mandated by federal or state governments related to COVID-19 are outside the scope of ASC 310-40 (TDR accounting) and don’t trigger TDR assessments for related loans such as state programs that require all institutions within a particular state to suspend mortgage payments for a specified period of time.
Plante Moran interpretation
The “modification program” concept is seemingly significant as this sets the date as to when an institution assesses current versus noncurrent status for individual borrowers. We believe the modification program date is the date on which a financial institution creates their policy or framework for modifications under the COVID-19 pandemic.
As a consequence of the decision to defer a borrower’s loan payments under a program as described above, there have been questions regarding the treatment of the resultant accrued interest receivable that will continue to accrue on the financial institution’s core system for loans that aren’t considered TDRs. Due to the presumption that borrowers aren’t in financial difficulty, it appears appropriate that interest income should continue to be recognized, and the financial institution will need to structure an arrangement with the borrower delineating how and when the accrued interest receivable will ultimately be collected.
In summary, we believe the spirit of the guidance is to provide financial institutions with a practical lens through which to view modifications in their loan portfolios. The guidance clarifies circumstances with which financial institutions may presume borrowers are not experiencing financial difficulties. However, for modifications of loans previously identified as watchlist or classified loans, financial institutions aren’t relieved of the requirement to consider, document, and conclude whether a borrower is in financial difficulty.