Banking Agencies Provide Guidance for Banks Working with Customers Affected by COVID-19

March 23, 2020

Underscoring statements last week expressing support for banks and other financial institutions working with borrowers affected by COVID-19, on Sunday, March 22, 2020, the federal bank regulatory agencies and state banking regulators issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide additional information and regulatory guidance on loan modifications.

Under the interagency statement, the federal and state agencies:

  • Encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID‑19.

The agencies stated that they will not criticize institutions for working with borrowers and will not direct institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs). In separate discussions with banks, representatives of the banking agencies stressed that they do not view TDRs as a meaningful metric of the quality of a bank’s loan portfolio and that the accounting and regulatory treatment of a COVID-19 related modification should be a secondary consideration reviewed after bank management decides whether to modify a loan in light of COVID-19 effects.

  • Confirmed with staff of the Financial Accounting Standards Board 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.

According to the agencies, 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. Further, regardless of whether modifications result in loans that are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected borrowers.

  • Clarified that, for loans that are not otherwise reportable as past due, institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.

According to the regulatory agencies, a loan’s payment date is governed by the due date stipulated in the loan documents. If a financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral. This applies for risk-based capital purposes as well.

  • Clarified that loans with short-term modifications should not generally be reported as nonaccrual.

The agencies indicated that institutions should refer to the applicable regulatory reporting instructions, as well as internal accounting policies, to determine if loans to stressed borrowers should be reported as nonaccrual assets.

  • Reminded institutions that loans that have been restructured as described above will continue to be eligible as collateral at the FRB's “discount window” based on the usual criteria.

The federal banking agencies had previously encouraged banks to use the discount window so that they can continue supporting households and businesses. The discount window provides short-term loans to banks and plays an important role in supporting the liquidity and stability of the banking system.

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus is available here.

In response to the coronavirus (COVID-19) pandemic, Lewis Rice has formed a COVID-19 Task Force which brings together subject matter authorities from various practice areas within the Firm who stand ready to assist our clients as they navigate these challenging and evolving issues. We will continue to monitor the myriad legal and other developments that may impact our banking clients and all of our business clients who have outstanding loans.

If you have legal questions related to COVID-19, please reach out to one of the authors above or another member of the Task Force.