Is It a Troubled Debt Restructuring?
(How COVID-19 affects TDR status)
During these unprecedented times, financial institutions are rapidly considering many ways to help their customers and communities affected by COVID-19, all while being operationally challenged themselves. One of the most frequent questions we are receiving is “Will delaying loan repayments for borrowers affected by COVID-19 result in designation as a troubled debt restructuring (TDR)?” This is also one of the fastest evolving issues we can recall. With remarkable speed and cooperation, the regulators and FASB have been releasing guidance with the most recent being this Financial Institution Letter (FIL).
FIL-22-2020 provides institutions with clarity on one of the key questions related to loan modifications and TDR consideration. In short, the FIL clarifies that:
- The agencies have confirmed with staff of the 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 TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
- Working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions 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, and thus no further TDR analysis is required for each loan modification in the program.
The FIL also provides other important information, as excerpted below:
- The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.
- The agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. The agencies consider such proactive actions to be in the best interest of institutions, their borrowers, and the economy.
- Modification or deferral programs mandated by the federal or a state government related to COVID-19 would not be in the scope of ASC 310-40, e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period.
- With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal loan documents. If a financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral.
To help you address modifications not covered by this FIL, we want to point you to the relevant GAAP guidance. It can be found in FASB ASC 310-40 with the most relevant section being “insignificant delays” contained in ASC 310-40-15. The following is an excerpt of this section:
310-40-15 Scope and Scope Exceptions – General
Evaluating Whether a Restructuring Results in a Delay in Payment That Is Insignificant
15-17 A restructuring that results in only a delay in payment that is insignificant is not a concession. The following factors, when considered together, may indicate that a restructuring results in a delay in payment that is insignificant:
- The amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due.
- The delay in timing of the restructured payment period is insignificant relative to any one of the following:
- The frequency of payments due under the debt
- The debt’s original contractual maturity
- The debt’s original expected duration.
15-18 If the debt has been previously restructured, an entity shall consider the cumulative effect of the past restructurings when determining whether a delay in payment resulting from the most recent restructuring is insignificant.
We encourage you to refresh your memory on these requirements because it will be important for institutions to support their assessments of the insignificance of delays when concluding that payment deferrals outside of those outlined in the FIL do not constitute a TDR.
As always, please do not hesitate to contact us with any questions at all that you have related to TDRs or anything else caused by these uncertain events. We are here to help in any way we can.
For more information or a discussion on how this may impact you, please contact Jeff Skaggs or your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.