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Federal and State Regulators Issue Much-Needed Guidance to Financial Institutions Making Loan Modifications Required by COVID-19

March 25, 2020

COVID-19 has had an unprecedented effect on the American economy, closing small businesses and putting many Americans out of work. Many bank customers are having difficulty meeting loan obligations or soon will. Lenders, in turn, are faced with the prospect of having non-performing loans accumulating in their portfolios.

As set forth below, federal regulators appear to be encouraging financial institutions facing this predicament to work with borrowers affected by COVID-19 through loan modification agreements by providing guidance with respect to such agreements.

On March 22, 2020, federal and state agencies issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing guidance on loan modifications.

According to the statement — issued by the Federal Reserve, Conference of State Bank Supervisors, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of the Comptroller of the Currency — financial institutions are encouraged to view loan modifications as a positive step towards mitigating adverse effects on borrowers, which modifications the agencies will not criticize, so long as accomplished through safe and sound practices.

Specifically, the statement advises that regulators:

  • Encourage financial institutions to work constructively with borrowers;
  • Will not criticize loan modifications (made through safe and sound practices) and will not direct modifications be automatically categorized as troubled debt restructurings (that is, “TDRs”);
  • Have confirmed with the Financial Accounting Standards Board that short-term modifications (made in good faith to borrowers who were current before modification) will not be characterized as TDRs;
  • Will view modifications for borrowers of one-to-four family residential mortgages (where loans were prudently underwritten and not past due or carried in nonaccrual status) will not result in loans being considered restructured or modified for the purpose of respective risk-based capital rules; and
  • Will view prudent loan modification programs as positive steps for effectively managing or mitigating adverse effects on borrowers due to COVID-19, leading to improved loan performance and reduced credit risk.

For reporting purposes, the statement further advises that the past due status of modified loans should be based on the due date stipulated in the loan documents, as modified within such modification program.

The statement further reminds institutions that those loans restructured in accordance with the policies set forth in the interagency statement will maintain eligibility to serve as collateral at the FRB’s discount window based on the usual criteria. It is worth bearing in mind that the statement requires financial institutions to continue to follow “safe and sound practices” and take “prudent efforts” in connection with any loan modifications.

The interagency statement can be found here.