Joint Statement on Additional Loan Accommodations Related to COVID-19
By: Steve H Powell & Company
On August 3, 2020, the Federal Financial Institutions Examination Council issued a joint statement with additional guidance regarding COVID loan modifications. The guidance is applicable to both commercial and consumer loans. The guidance is to be “tailored” to be suitable to an institution’s size, overall complexity, as well as risk profile.
The FFIEC acknowledges that:
The FFIEC members have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the COVID event. Specifically, the FFIEC members have stated that they view loan accommodations as positive actions, which can mitigate adverse effects on borrowers caused by the COVID event.
The August 2020 guidance was intended to assist banks with assessing borrowers who had been granted COVID payment relief and may not be able to return to the original terms of their loans or may not be able to meet their debt service obligations. The guidance is to be viewed in light of prudent capital preservation, portfolio management regarding compliance, asset quality, and operational risks. An institution’s actions:
In general, the guidance indicates “following an accommodation, a financial institution reassesses risk ratings for each loan based on a borrower’s current debt level, current financial condition, repayment ability, and collateral”. The guidance does not dissuade institutions from providing additional modifications & continuing to work with COIVD impacted borrowers, yet it does state any actions are to be “based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower”. Regulatory expectations are to have a timely assessment of a borrower’s current & projected financial health and cash flow as well as an assessment of if/how current economic conditions may have affected collateral values. An adverse loan grade will not be predicated based solely on a decline in collateral margin, but loan files should be documented – again focusing on a borrower’s current cash flow & debt service ability.
The majority of SHPCO client discussions of COVID payment modification revolve around any potential TDR classification and accrual status. Initial Regulatory guidance, overly simplified, allowed a six month COVID payment modification / extension period with out triggering a TDR classification or downgrade to non-accrual status. Any additional COVID modification beyond an initial six month concession, while prudent, should be carefully assessed. It would feel as if additional COVID payment modifications beyond the initial six-month-window that are not fully documented with current credit & collateral assessment could raise Regulatory scrutiny.
For example, if the cumulative modifications for a loan are all COVID event related, in total represent short-term modifications (e.g., six months or less combined), and the borrower is contractually current (i.e., less than 30 days past due on all contractual payments) at the time of the subsequent modification, management may continue to presume the borrower is not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and the subsequent modification of loan terms would not be considered a TDR.
The August 2020 and accounting guidance indicate an institution should assess accrual status & TDR treatment as based, in part on:
It would appear current Regulatory guidance somewhat harkens to historical practices dating to the Great Recession – the most recent mass-application of Trouble Debt Restructure & non-accrual. Many institutions had AD&C borrowers who were not past due on interest only payments, yet the AD&C borrowers were subjected to Regulatory criticism and were classified as TDRs or downgraded to non-accrual. The historical loan files did not contain timely financial information, or realistic pro-formas, and the financial then available did not reflect sufficient cash flow to provide for timely debt service (on ‘proper’ amortization schedules rather than interest only). Additionally, many of the AD&C files did not contain an updated collateral assessment as based on prevailing market conditions.
The FFIEC acknowledges that:
The FFIEC members have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the COVID event. Specifically, the FFIEC members have stated that they view loan accommodations as positive actions, which can mitigate adverse effects on borrowers caused by the COVID event.
The August 2020 guidance was intended to assist banks with assessing borrowers who had been granted COVID payment relief and may not be able to return to the original terms of their loans or may not be able to meet their debt service obligations. The guidance is to be viewed in light of prudent capital preservation, portfolio management regarding compliance, asset quality, and operational risks. An institution’s actions:
- Should be based on an understanding of the credit risk of the borrower
- Should be consistent with applicable laws and regulations
- Could ease cash flow pressures on affected borrowers & improve their capacity to service debt
- And should facilitate a financial institution’s ability to collect on its loans
In general, the guidance indicates “following an accommodation, a financial institution reassesses risk ratings for each loan based on a borrower’s current debt level, current financial condition, repayment ability, and collateral”. The guidance does not dissuade institutions from providing additional modifications & continuing to work with COIVD impacted borrowers, yet it does state any actions are to be “based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower”. Regulatory expectations are to have a timely assessment of a borrower’s current & projected financial health and cash flow as well as an assessment of if/how current economic conditions may have affected collateral values. An adverse loan grade will not be predicated based solely on a decline in collateral margin, but loan files should be documented – again focusing on a borrower’s current cash flow & debt service ability.
The majority of SHPCO client discussions of COVID payment modification revolve around any potential TDR classification and accrual status. Initial Regulatory guidance, overly simplified, allowed a six month COVID payment modification / extension period with out triggering a TDR classification or downgrade to non-accrual status. Any additional COVID modification beyond an initial six month concession, while prudent, should be carefully assessed. It would feel as if additional COVID payment modifications beyond the initial six-month-window that are not fully documented with current credit & collateral assessment could raise Regulatory scrutiny.
For example, if the cumulative modifications for a loan are all COVID event related, in total represent short-term modifications (e.g., six months or less combined), and the borrower is contractually current (i.e., less than 30 days past due on all contractual payments) at the time of the subsequent modification, management may continue to presume the borrower is not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and the subsequent modification of loan terms would not be considered a TDR.
The August 2020 and accounting guidance indicate an institution should assess accrual status & TDR treatment as based, in part on:
- Changes in borrower financial condition
- Changes in collateral values
- Current lending practices
- Current economic conditions
It would appear current Regulatory guidance somewhat harkens to historical practices dating to the Great Recession – the most recent mass-application of Trouble Debt Restructure & non-accrual. Many institutions had AD&C borrowers who were not past due on interest only payments, yet the AD&C borrowers were subjected to Regulatory criticism and were classified as TDRs or downgraded to non-accrual. The historical loan files did not contain timely financial information, or realistic pro-formas, and the financial then available did not reflect sufficient cash flow to provide for timely debt service (on ‘proper’ amortization schedules rather than interest only). Additionally, many of the AD&C files did not contain an updated collateral assessment as based on prevailing market conditions.
For additional guidance & reference please see:
Proclamation 9994, “Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak,” 85 FR 15337 (March 18, 2020) “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” (April 7, 2020)
ASC 310-10-35: https://asc.fasb.org/imageRoot/39/84156639.pdf
ASC 326-20-30-2: https://asc.fasb.org/imageRoot/39/84156639.pdf
“Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings” (October 24, 2013)
Proclamation 9994, “Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak,” 85 FR 15337 (March 18, 2020) “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” (April 7, 2020)
ASC 310-10-35: https://asc.fasb.org/imageRoot/39/84156639.pdf
ASC 326-20-30-2: https://asc.fasb.org/imageRoot/39/84156639.pdf
“Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings” (October 24, 2013)