COVID-19 Modifications / Trouble Debt Restructuring
By: Steve H Powell & Company
With ongoing market disruptions, a common asset quality topic is COVID-19 payment modifications & potential Troubled Debt Restructures (TDR). Overly simplified, for borrowers who were current on their loans, COVID-19 related payment modifications could be granted, and the modifications would not constitute a TDR.
As the COVID-19 Pandemic continues, issues that were not apparent in the early months after modification plans were started have become more evident. Regulatory guidance on COVID-19 modifications provides for two different paths, each with different requirements. One path follows the guidance / requirements of Section 4013 of the CARES Act while the other provides for non-section 4013 modifications. Generally, Section 4013 guidance provides for longer and more flexible modification terms (without TDR identification). A plain text reading of the requirement would seem to indicate that Lenders must “elect” to utilize Section 4013 guidance if they plan to follow those requirements for a particular loan. A review of COVID-19 related loan modifications across our client base finds little information in file that details the financial institution’s intention to implement a 4013 modification. Steve H. Powell & Company recommends that a credit memo, or other similar documentation, is prepared and documented in the file of record. This document should include a discussion of the Section 4013 election, especially when the cumulative extensions or modifications exceed six months. Without formally documenting this election, many of these long-term modifications could be deemed to be TDR’s by regulatory agencies.
While numerous documents provide guidance on the subject, one of the best and most concise publications is the “OCC Reference Guide: TDR Designation and COVID-19 Loan Modifications”. The chart at the bottom of the first page details the differences between Section 4013 and non-Section 4013 modifications and the flowchart on page two is a very useful tool in determining TDR status and identification. The link to the OCC Publication below is updated to include the most recent changes implemented in accordance with Section 541 of the Consolidated Appropriations Act, 2021.
https://www.occ.treas.gov/news-issuances/bulletins/2020/COVID-19-loan-modifications-reference-guide.pdf
As the COVID-19 Pandemic continues, issues that were not apparent in the early months after modification plans were started have become more evident. Regulatory guidance on COVID-19 modifications provides for two different paths, each with different requirements. One path follows the guidance / requirements of Section 4013 of the CARES Act while the other provides for non-section 4013 modifications. Generally, Section 4013 guidance provides for longer and more flexible modification terms (without TDR identification). A plain text reading of the requirement would seem to indicate that Lenders must “elect” to utilize Section 4013 guidance if they plan to follow those requirements for a particular loan. A review of COVID-19 related loan modifications across our client base finds little information in file that details the financial institution’s intention to implement a 4013 modification. Steve H. Powell & Company recommends that a credit memo, or other similar documentation, is prepared and documented in the file of record. This document should include a discussion of the Section 4013 election, especially when the cumulative extensions or modifications exceed six months. Without formally documenting this election, many of these long-term modifications could be deemed to be TDR’s by regulatory agencies.
While numerous documents provide guidance on the subject, one of the best and most concise publications is the “OCC Reference Guide: TDR Designation and COVID-19 Loan Modifications”. The chart at the bottom of the first page details the differences between Section 4013 and non-Section 4013 modifications and the flowchart on page two is a very useful tool in determining TDR status and identification. The link to the OCC Publication below is updated to include the most recent changes implemented in accordance with Section 541 of the Consolidated Appropriations Act, 2021.
https://www.occ.treas.gov/news-issuances/bulletins/2020/COVID-19-loan-modifications-reference-guide.pdf