Regulators and Congress have created an environment that strongly encourages working with borrowers affected by the pandemic. Some accounting rules have been loosely interpreted, and some temporarily relaxed, in an attempt to relieve some of the burdens associated with these actions.
Given the economic situation, borrowers will want to take advantage of the various relief options, including loan modifications such as forbearance, payment suspensions, extensions, etc.
While banks have been relieved of the burden of TDR accounting for these modifications, there are other accounting impacts that need to be considered and other important questions that need to be addressed:
- If you offer modification options to borrowers, do you have a process in place to track these now, and also monitor subsequent performance? Are you able to extract information in a way that provides insight about risk to your business?
- Are you planning to disclose the number and type of modifications you offered due to COVID-19? Is a modification a “risk characteristic” under your allowance disclosures?
- If you change loan terms, is your servicing system able to handle these? Can your servicing system track the old terms and the new terms simultaneously? Is your servicing system able to perform major/minor mod analysis for the large volume of modifications expected?
- If you have multiple servicing systems, do they track the loans/perform the calculations consistently?
- Will you calculate a new effective yield compliant with existing guidance? Do you have the ability to report on the impact of your policy elections?
- Have you thought about the longer term impacts after the pandemic ends? Will some of these become TDRs? How are you considering impacts to your CECL process for both actual and expected TDRs?
- Do you have systems in place to perform large-scale, SOX-controlled individual impairment reviews?
SS&C Primatics specializes in helping our clients when accounting for loans under GAAP diverges from the transactional processing capabilities of traditional servicing systems. Our EVOLV platform has best-in-class reporting integrating risk and finance. Our outsourcing and advisory services have helped dozens of financial institutions with their trickiest loan accounting challenges.
For additional insights and how SS&C Primatics can help, write to us at firstname.lastname@example.org.