Short-term loan modifications as part of COVID-19 relief aren’t TDRs

New guidance from a group of regulatory agencies helps clarify rules for struggling employers working on loan modifications with their financial institutions.

The statement confirms that for borrowers that are current on their loan payments, short-term modifications due to the COVID-19 pandemic won’t be considered troubled debt restructurings (TDRs). The statement is also consistent with a related provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and it comes after consultations with the Financial Accounting Standards Board (FASB).

Accounting for TDRs

Under Accounting Standards Codification (ASC) Topic 310-40, Receivables — Troubled Debt Restructurings by Creditors, a debt restructuring is considered a TDR if

• the borrower is troubled, and
• the creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession it wouldn’t otherwise consider

Under U.S. Generally Accepted Accounting Principles (GAAP), types of loan modifications that may be classified as a TDR include, but aren’t limited to:

• a reduction of the stated interest rate for the remaining original life of the debt
• an extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk
• a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement
• a reduction of accrued interest

The concession to a troubled borrower may include a restructuring of the loan terms to alleviate the burden of the borrower’s near-term cash requirements, such as a modification of terms to reduce or defer cash payments to help the borrower attempt to improve its financial condition.

Providing relief in times of crisis

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) was issued by the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and state banking regulators in April. This guidance doesn’t change the accounting treatment for loan modifications and TDR classifications under ASC Topic 310-40.

Instead, it interprets the existing accounting rules and encourages financial institutions to work with borrowers that are struggling to meet their payment obligations. The agencies confirmed with FASB staff that short-term modifications made in good faith to borrowers experiencing short-term operational or financial problems as a result of COVID-19 won’t automatically be considered TDRs if the borrower was current on making payments before the relief. Borrowers are considered current if they’re less than 30 days past due on their contractual payments at the time a modification program is implemented.

This relief applies to short-term:

• modifications from payment deferrals
• extensions of repayment terms
• fee waivers
• other payment delays that are insignificant compared to the amount due from the borrower or to the original maturity/duration of the debt

In addition, loan modifications or deferral programs mandated by a federal or state government in response to COVID-19, such as financial institutions being required to suspend mortgage payments for a period of time, wouldn’t be within the scope of ASC Topic 310-40. The guidance also includes provisions relating to exceptions for financial institutions’ regulatory reporting of past-due loans and loans being reported as nonaccrual assets as a result of COVID-19.

Other relief measures

The CARES Act, which was enacted on March 27 to provide financial relief during the COVID-19 pandemic, is consistent with the statement issued by the financial institution regulators. Specifically, Section 4013 of the CARES Act permits financial institutions not to classify a COVID-19-related loan modification as a TDR if:

• it was made between March 1, 2020, and the earlier of December 31, 2020, or 60 days after the end of the public health emergency
• the underlying loan wasn’t more than 30 days past due as of December 31, 2019

In general, the CARES Act encourages financial institutions to consider short-term debt modifications that can ease cash flow pressures on affected borrowers, improve their capacity to service debt, increase the potential for financially stressed residential borrowers to keep their homes and facilitate the financial institution’s ability to collect on its loans. These concessions may help mitigate the long-term impact of the pandemic on borrowers by avoiding delinquencies and other adverse consequences.

Developing situation

Financial institution regulators understand that the COVID-19 pandemic is an extraordinary, evolving situation that continues to present challenges to creditors and borrowers alike. For more insight on how these changes could affect you, reach out to an advisor at KraftCPAs.

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