Loan Modifications Revisited Posted by AVCU on 11:05 AM

As you may know, the federal financial institution agencies, in consult with state financial institution regulators, have issued statements on loan modifications to those borrowers affected by COVID-19.  In addition, the agencies have stated that examiners will not criticize conservative and prudent efforts by credit unions, regardless of whether any modifications are considered TDRs or are adversely classified.

As you know the CARES Act permits financial institutions to temporarily suspend certain requirements regarding TDRs during the COVID-19 pandemic.  Last month's (April 2020) revised statement on loan modifications provides the framework for assisting financial institutions in determining which loan modifications are not considered TDRs as a result of the COVID-19 pandemic.

Loan modifications under Section 4013 of the CARES Act (a section 4013 loan)
For an eligible loan not to be categorized as a TDR it must meet the following requirements:

• The loan modification is as a result of difficulties related to COVID-19
• The loan modification occurs between March 1, 2020 and December 31, 2020 (or 60 days after December 31, 2020 or the end of the COVID-19 national emergency)
• Executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020 (applicable period).

If the modification meets the three requirements above it is a section 4013 loan and does not qualify as a TDR as per the 4/7/2020 interagency statement  (TDR analysis using ASC Subtopic 310-40 is not required).

In addition, section 4013 loans are not reported as TDRs in regulatory reports -- BUT you need to maintain records of the volume of section 4013 loans granted for supervisory purposes.

Loan modifications NOT under Section 4013 of the CARES Act
For loan modifications not eligible as a section 4013 loan, the interagency statement provides the following, "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 TDR's under ASC Subtopic 310-40."  Hmm...so what type of modifications are included?  The statement provided the following examples:  short-term (6 months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. As for what is meant by "current," borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

Therefore, based on the information above, for a loan modification granted during the COVID 19 pandemic, NOT to be considered a TDR, the borrower is considered current if they are less 30 days past due on their contractual payments at the time a modification program is implemented.  In addition, a borrower is current on the existing loan either individually (or as part of a program for creditworthy borrowers) who are experiencing short term financial or operational problem as a result of COVID-19.

So, for a loan modification to NOT be considered a TDR based on the interagency statement, it meets the following requirements:

• The modification is in response to the National Emergency (COVID-19)
• Payments at the time the modification program is implemented, are current
• The modification is short term (six months or less).

If the debt doesn't meet these requirements or is related to a principal or interest deferral then you need to conduct an analysis using ASC Subtopic 310-40.

Past Due Reporting
Do Not report loans deferrals granted as a result of the COVID-19 pandemic as past due.  Why? The interagency statement provided that because a loan's payment date is governed by the due date stipulated in the legal agreement.  If there is an agreed upon payment deferral by the financial institution, then there may be no contractual payments being past due.  Therefore, they are not considered past due during the period of deferral.

Should these loans be reported as non-accrual assets?
It is likely that the loans deferred as per the issued statement guidance should not be reported as non-accrual assets in regulatory reports.  However, Call Report instructions, as well as your credit union's internal accounting policies, should be consulted to assist in determining non-accrual status for regulatory reporting purposes.

Charge-Offs
As for charge-offs, time will tell.  Time will provide more indication to you as to if a specific loan will not be repaid.  Credit unions should consult NCUA Letter to Credit Unions 03-CU-01 for more information.