Published April 10, 2020

Loan Modifications Under the CARES Act: Revised Interagency Guidance Offers Clarity

The Board of Governors of the Federal Reserve System (or Federal Reserve Board, FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the State Banking Regulators (the Agencies), have issued a Revised Interagency Statement (the Revised Statement). Its aim is to provide clarity related to an Interagency Statement (the Statement) issued March 22, 2020, and to address the interaction between the Statement and Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, 2020. The Revised Statement addresses much of what was previously documented in the Statement. One of the bigger points of clarification is as follows:

Accounting and Reporting Considerations – As described in the CARES Act, a financial institution may account for an eligible loan modification based on Section 4013 of the Act, or based on guidance established by the Financial Accounting Standards Board (FASB) in Accounting Standards Codification (ASC) Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors.

COVID-19-Related Loan Modifications Under Section 4013:

The Revised Statement indicates that to be an eligible loan under Section 4013, “a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020.”

Financial institutions that account for eligible loan modifications under Section 4013 do not have to apply the more complex and judgment-laden accounting requirements of ASC 310-40 and do not have to report the loan as a troubled debt restructuring (TDR) for regulatory reporting purposes. Additionally, financial institutions do not need to determine impairment associated with certain modifications, such as interest rate concessions, payment deferrals, or loan extensions as required by ASC 310-40.

Financial institutions should maintain adequate documentation related to modifications under Section 4013, as such information may be collected for supervisory purposes.

COVID-19-Related Loan Modifications Not Under Section 4013:

Not all loan modifications associated with COVID-19 will qualify under Section 4013. There may be instances where the loan modification occurs outside the allowable time frame.

As indicated in the Revised Statement, “According to ASC 310-40, a restructuring of a debt constitutes a TDR 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.” However, as previously documented in the Statement, the Agencies confirmed with the FASB that short-term modifications, made on a “good faith” basis in response to COVID-19, for borrowers who were current prior to any relief, are not to be considered TDRs. Thus, no further TDR analysis is required. The Revised Statement clarifies that–“[t]his includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant.” Borrowers should be considered current if they are “less than 30 days past due on their contractual payments at the time a modification program is implemented.”

Factors to be considered when determining if a modification is insignificant can be qualitative and should be based on “whether the amount of delayed restructured payments is insignificant relative to the unpaid principal or collateral value of the debt, thereby resulting in an insignificant shortfall in the contractual amount due from the borrower, and whether the delay in timing of the restructured payment period is insignificant relative to the frequency of payments due under the debt, the debt’s original contractual maturity, or the debt’s original expected duration.”

If you have any questions related to the Statement, Revised Statement, or any other issues your financial institution may be experiencing related to COVID-19, visit our COVID-19 hub, or contact one of our PYA executives below at (800) 270-9629.

Disclaimer: To the best of our knowledge, this information was correct at the time of publication. Given the fluid situation, and with rapidly changing new guidance issued daily, be aware that some or all of this information may no longer apply. Please visit our COVID-19 hub frequently for the latest updates, as we are working diligently to put forth the most relevant helpful guidance as it becomes available.

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