Pub. 11 2020 Issue 2

By Kelly Shafer, Suttle & Stalnaker, PLLC Navigating Loan Modifications in Response to COVID-19 D uring this unprecedented time, financial institutions may be faced with a growing number of borrowers requiring modifications to their loan terms. With many customers feeling the economic impacts of COVID-19 and struggling to make payments, institutions will inevitably experience an increase in the number of troubled debt restructur- ings (TDRs). The good news is, regulators and the Financial Accounting Standards Board (FASB) are working together to pro- vide practical solutions to relieve some of the reporting burdens on institutions as they are on the front lines helping cus- tomers through these uncertain times. Section 4013 of the Coronavirus Aid, Re- lief, and Economic Security Act (CARES Act), signed into law March 27, 2020, grants financial institutions a simplified option to account for loan modifications made in response to COVID-19. The CARES Act temporarily suspends cer- tain U.S. GAAP requirements, allowing institutions to forgo traditional TDR accounting treatment. Additionally, April 7, 2020, several bank- ing agencies came together to issue an “Interagency Statement on Loan Modifi- cations for Financial Institutions Work- ing with Customers Affected by the Coronavirus (Revised)” (the Interagency Statement) which provides an interpre- tation on how accounting guidelines under Accounting Standards Codifi- cation (ASC) 310-40, “Troubled Debt Restructurings by Creditors” apply to certain COVID-19 related modifications that do not qualify for treatment under Section 4013 of the CARES Act. Regulators and the FASB have come together during this crisis to encour- age financial institutions to consider modifications and loan accommodation programs to assist borrowers facing set- backs from COVID-19. They are stating that financial institutions will not be crit- icized for prudent efforts to work with borrowers in a safe and sound manner, considering such proactive measures to be in the best interest of institutions, borrowers and the economy. Section 4013 of the CARES Act FASB defines a troubled debt restructur- ing as a restructuring of debt where the creditor, for economic or legal reasons re- lated to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. While the current economic situation faced by many borrowers certainly appears to fall within this definition, Section 4013 of the CARES Act allows for loan modifications to be excluded from traditional TDR accounting treatment, assuming the modification meets the following criteria: • The modification must be related to COVID-19 • The loan cannot have been more than 30 days past due as of Dec. 31, 2019 • The modification must be executed between March 1, 2020, and the earlier of 60 days after the date of termination of the National Emer- gency or Dec. 31, 2020 Loan modifications meeting these require- ments are not considered to be TDRs. ASC 310-40 Financial institutions may find they have certain borrowers requiring a loan modification that does not meet all of the criteria for treatment under Section 4013. For example, a borrower’s loan may be modified in response to COVID-19 outside of the designated period for treatment under Section 4013. In this case, institutions have the option to account for the modification under the Interagency Statement interpretation of ASC 310-40, should it meet the following requirements: • The modification must be related to COVID-19 Kelly Shafer is a member in the Charleston office of Suttle & Stalnaker, PLLC. Kelly has over 15 years of experience in public accounting practice and, as a member of the firm’s Financial Institution Services Group, specializes in external audit services for financial institutions. She can be reached at kshafer@suttlecpas.com . • The loan cannot have been more than 30 days past due when the modification program was imple- mented • The modification is short-term (e.g., six months) If the modification meets all of the above criteria, it is not considered a TDR. The key here is that the modifi- cation is short-term in nature, so the borrower is not considered to be expe- riencing financial difficulty. Troubled borrowers with a history of late payment prior to COVID-19 typically will not be eligible for the modified accounting treatment under either of the above provisions, even if their financial situation is worsened by COVID-19. If a modification does not meet the criteria for treatment under either Section 4013 of the CARES Act or the interpretation under the Interagency Statement, the institution should follow its existing accounting policies to deter- mine whether the modification should be accounted for as a TDR. Reporting and Documentation Loan modifications related to COVID-19 that meet the criteria in either of the two scenarios outlined above are not required to be reported as TDRs on the call report. However, it is anticipated that there will likely be new financial statement disclosure requirements surrounding credit quality in relation to modified loans. It is recommended that loans modified in response to COVID-19 be tracked separately for internal record keeping. Data should be maintained on the volume of loans, loan type, type of modification, etc., to facilitate any new disclosure requirements.  Pub. 11 2020 I Issue 2 27 West Virginia Banker