FASB, regulators ease rules for loan modifications

The FASB has quickly given its support to a new regulatory statement that urges banks to work with borrowers impacted by the coronavirus pandemic, which in turn will allow loans to be modified without penalties and implications that usually accompany a default.

The board said it agreed with a decision made by six federal and state banking agencies clarifying that lenders will not need to automatically classify loans that were in good standing prior to COVID-19 as troubled debt restructurings (TDRs).

In a joint statement, the Board of Governors of the Federal Reserve System, the Conference of State Bank Supervisors, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency said: “The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. The statement reminds institutions that not all modifications of loan terms result in a TDR.”

The measure 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,” the interagency guidance states.

The decision means that good-standing loans, modified because of coronavirus-related hardship, will stay within the current expected credit loss (CECL) model under Topic 326, Credit Loss, as opposed to having to apply FASB ASC 310-40, Receivables-Troubled Debt Restructurings by Creditors. TDR accounting is typically triggered if the creditor — for economic or legal reasons related to the debtor’s financial difficulties — grants a concession to the debtor that it would not otherwise consider.

CECL rules would be simpler, practitioners said. In addition, there are a fair number of disclosures required for loans classified as TDRs and therefore the interagency guidance would also eliminate the need to present these potentially voluminous disclosures.

The FASB’s swift response on loan modifications contrasts heavily with its approach to legislative pressure about its CECL provisions. The rules went into effect Jan. 1, 2020, for large public companies; smaller public companies and private companies have until 2023 to adopt the guidance.

It has been more than a year that bills have been proposed by the U.S. House of Representatives to delay or to block CECL. On March 22, Senate Republicans released an economic stimulus package that would delay the provisions. Last week, the chair of the FDIC wrote letters to the House, Senate, and the FASB about delaying or blocking CECL, and FASB was not as responsive at the time.

Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service [AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service [SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets-An Explanation and Analysis of Accounting Standards Update No. 2016-13.

To learn more about how this could affect your specific situation, contact a KraftCPAs professional.

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