Federal and State Banking Regulators Issue Joint Guidance on Loan Modifications for Borrowers Impacted by the Coronavirus
In response to the unprecedented economic effects from the ongoing outbreak of the novel coronavirus (“COVID-19”), on March 22, 2020, the five federal bank regulatory agencies [1] and the Conference of State Bank Supervisors jointly issued an Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus. [2]
This joint guidance encourages banks, savings associations, and credit unions to make loan modifications for borrowers affected by COVID-19. The key points in the joint guidance are:
- Banks, savings associations, and credit unions are encouraged to work constructively with borrowers affected by COVID-19.
- Federal and state banking regulators will not criticize supervised financial institutions for prudent loan modifications and will not direct those institutions to automatically categorize all COVID-19-related loan modifications as troubled debt restructurings (“TDRs”). The federal and state banking regulators consider proactive actions to mitigate credit risk through prudent restructurings and other actions to be in the best interest of financial institutions, borrowers and the economy.
- Federal banking regulators have confirmed with the Financial Accounting Standards Board that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current (i.e., less than 30 days past due on contractual payments) prior to any loan modification are not TDRs.
- For loan modification programs designed to provide temporary relief for borrowers affected by COVID-19, supervised 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.
- The Federal Reserve, the FDIC and the OCC have confirmed that modifications within the scope of this guidance to 1-to-4 family residential mortgages, where the loans are prudently underwritten and not past due or on nonaccrual status, will not cause the loans to be considered restructured or modified for the purposes of risk-based capital rules.
- Financial institutions will not be expected to designate loans for which deferrals have been granted due to COVID-19 as past due because of the deferral. Instead, a modified loan’s past due status will continue to be governed by the payment due date stipulated in the legal loan documents.
Banks of all sizes should begin developing written guidelines for a COVID-19 borrower relief program, including standards for evaluating and granting loan modification requests and processes for monitoring and administering loans that have been modified through the program. Banks should also carefully review their standard modification documents for residential, commercial and consumer loans and consult with outside counsel regarding whether to update those documents in anticipation of loan modifications due to the effects of COVID-19.
The Federal Reserve has encouraged financial institutions to use the Federal Reserve’s discount window as the adverse economic effects from the COVID-19 pandemic spread throughout the U.S. economy. Accordingly, loans that have been restructured consistent with the joint guidance will be eligible collateral for borrowings through the Federal Reserve’s discount window based on the usual criteria.
Regardless of asset size, many banks now find themselves in uncharted territory. The Troutman Sanders Financial Institutions team is here to help answer your questions about the legal and economic impacts of the COVID-19 pandemic.
Please visit the Pepper Hamilton LLP / Troutman Sanders LLP COVID-19 Resource Center for COVID-19 news and developments, recommendations from leading health organizations, and tools that businesses can use free of charge.
[1] The Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the National Credit Union Administration, the Office of the Comptroller of the Currency (the “OCC”), and the Consumer Financial Protection Bureau.
[2] A copy of the joint guidance is available at this link: https://www.fdic.gov/news/news/press/2020/pr20038a.pdf