By: Margaret Probish
April 2, 2020
On March 22, 2020 the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau, and the State Banking Regulators (collectively the “Agencies”) issued an interagency statement to financial institutions to work with borrowers who are or may be unable to meet their contractual payment obligations as a result of the COVID-19 pandemic. In the statement, which is available here, the Agencies encouraged lenders to actively work with borrowers on risk mitigation strategies including loan modifications. Subsequent to the joint statement, the FDIC and the OCC has provided guidance on loan modifications and have highlighted areas in which the FDIC or OCC will provide more flexibility in their regulatory oversight.
Subsequent to the joint statement, the FDIC issued the guidance available here encouraging payment accommodations with borrowers impacted by COVID-19 that facilitates the borrowers’ ability to work through the immediate impact of the virus while ultimately targeting loan repayment. Examples of such accommodations provided by the FDIC include addressing any deferred or skipped payments by either extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. In addition, the guidance notes that there is no regulatory requirement for a financial institution to obtain updated valuation information for real estate related transactions when granting short-term loan modifications to borrowers affected by COVID-19.
While not specifically mentioned in recent guidance, forbearance agreements can be an effective approach to mitigating short term risk. An initial decision for the lender is whether to waive existing defaults or forbear from taking action with respect to the defaults. Borrowers may seek to have defaults waived to prevent violating covenants in other agreements or for other bonding or reporting purposes. However, lenders may insist upon forbearance so that they can rely on the defaults if enforcement of loan rights and remedies is ultimately required. Forbearance agreements typically include acknowledgement of specific defaults and setting benchmarks to be satisfied during the forbearance period which can be demonstrated through additional reporting requirements and communications with the lender. Specificity of the defaults is important to both the lender and borrower. For lenders, if additional defaults occur then the forbearance agreement can be terminated. For borrowers, clearly understanding the forbearance protection – which defaults has the lender agreed to forbear – gives certainty in the forbearance period.
Modifications of loan terms do not necessarily result in so-called troubled debt restructurings (TDRs) for accounting purposes. As set forth in the recent guidance, the Agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications such as payment deferrals, extensions of repayment terms, or other delays in payment for less than six months made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.