Many banks are working on ways to offer relief to borrowers given the sudden changes to the market because of COVID-19. While modification options offered to borrowers vary among financial institutions and particulars of the loan itself, one of the most common being considered is a short-term suspension of required payments, often for a period of 90 days and often offered to all customers who are mostly current.
But a question often arises in circumstances like these around whether these modifications should be considered a Troubled Debt Restructuring, or a TDR, under US GAAP. ASC 310 lays out two main considerations for a loan modification to be considered a TDR:
- The creditor granted a more than an insignificant concession to the debtor that it would not otherwise consider; and,
- The concession was made driven by the debtor’s financial difficulties.
Based on these two requirements, modifications granted in connection with the coronavirus would often not meet the definition of a TDR, especially if the same relief is granted to all customers because:
- The concessions currently being made are considered insignificant as they are short-term in nature and do not affect the expected cash flows expected to be received by the financial institution over the life of the loan. ASC 310 provides a definition in which a concession would not be considered to be significant.
“A restructuring that results in only a delay in payment that is insignificant is not a concession. The following factors, when considered together, may indicate that a restructuring results in a delay in payment that is insignificant:
a. The amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due.
b. The delay in timing of the restructured payment period is insignificant relative to any one of the following:
1. The frequency of payments due under the debt
2. The debt’s original contractual maturity
3. The debt’s original expected duration.”
In the case of COVID-19 related modifications, the delay in payments will not result in a shortfall in the contractual amount due as they are a purely a delay and not a forgiveness of the principal amounts due. In addition, the guidance provides 3 different examples in ASC 310-40-55 in which the guidance shows that a three-month delay in payments is considered an insignificant delay across three different scenarios for three different asset classes:
- Commercial Real Estate Debt with Balloon Payment
- Residential Mortgage Debt
- Commercial Line of Credit
In each case, further analysis may be required around any principal forgiveness, but the delay in payments itself is not considered significant.
- Most borrowers are current, defined as less than 30 days past due. This is particularly because the state of emergency was declared in the US in early March and businesses began to be forced to close in mid-March. In addition, for those modifications granted to all borrowers, the concessions would not be considered to be driven by a specific debtor’s financial difficulties.
Confirmation with the FASB
The FASB confirmed this analysis, as outlined in ASC 310 in a recent discussion with the interagency staff charged with the regulation of depository institutions comprised of the following agencies: Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency Consumer, and Financial Protection Bureau Conference of State Bank Supervisors. This discussion is outlined in the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” issued on March 22, 2020. The Statement noted that:
“Agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that 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 TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. 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. Working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, 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, and thus no further TDR analysis is required for each loan modification in the program.”
As long as a modification meets the above requirements, it would not be considered a TDR simply because the modification was made in the bad macro-economic circumstances that we are facing today. One point to note is that “short-term” is explicitly defined as six months, a period longer than prior industry convention. However, other modifications made during this time that meet the requirements laid out in ASC 310-20 are still subject to TDR accounting.
Note: The proposed Coronavirus Relief Bill included language that would change the definition of a TDR for the duration of the national emergency. Guidance around the interpretation and implementation of this change would require input from the SEC and/or the FASB.
For more information about how SS&C Primatics can help you with your loan modifications, contact us.
Written by Theresa Meawad
Senior Director & Head of Solutions Consulting, SS&C EVOLV