Guidance for Financial Institutions in Light of COVID-19

March 26, 2020 | Article

As the United States deals with the effects of the Coronavirus Disease 2019 (COVID-19), financial institutions are not only being affected themselves, but also trying to understand how to best serve their clients.

Recent guidance has been issues to help aid financial institutions as they deal with the impact of the coronavirus pandemic.

COVID-19 is having an impact on numerous organizations. We’ve developed resources to help you make sense of it all.

Loan Modification to Borrowers
The Financial Accounting Standards Board (FASB) recently issued the following statement: 

“Earlier today, the Federal and state prudential banking regulators issued a joint statement that included guidance on their approach to the accounting for loan modifications in light of the economic impact of the coronavirus pandemic. This guidance was developed in consultation with the staff of the FASB who concur with this approach and stand ready to assist stakeholders with any questions they may have at this time.”

Financial institutions are encouraged to work prudently with their loan customers who may have or are currently having difficulties meeting their payment obligations because of COVID-19. Loan modification programs are positive actions that can mitigate adverse effect on loan customers as a result of COVID-19. Regulatory agencies have indicated that they will not criticize institutions for working with their loan customers as it relates to loan modification programs and automatically categorize all COVID-19 related loan modifications as troubled debt restructures (TDR).

Troubled Debt Restructures
Accounting Standards Codification (ASC) 310-40-20, defines a TDR as a restructuring of a debt 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.

FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. Short-term modifications, generally meaning six months or less, would include payment deferrals, fee waivers, extension of payment terms, or other delays in payment that are insignificant. Loan customers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

For modification programs designed to provide temporary relief for borrowers affected by COVID-19, financial institutions may presume that loan customers that are current on payments are not experiencing financial difficulties at the time of the modification for the purposes of determining TDR status, and no further TDR analysis is required for each loan modification qualifying for the program. It should be noted that modification or deferral programs mandated by Federal or state government related COVID-19 would not be in the scope of ASC 310-40.

Financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due as a result of the deferral if these loans are not otherwise reportable as past due. If the financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans would not be considered past due during the period of deferral. Additionally, during the short-term arrangements specified in the joint regulatory statement, loans should generally not be reported as nonaccrual.

Bank Capital Buffer Requirements
There have been revised definitions of eligible retained income and potential limitations will become more gradual. This will allow banks to provide community lending support without adversely affecting distributions owners may need, even though they may drop below capital buffer requirements.

Important considerations include:

  • FDIC supervised institutions must maintain the minimum capital requirements.
  • Maintenance of a capital conversation buffer is designed to help institutions through potentially stressful economic cycles.

Agency recommendations and interim final rules are there to help financial institutions facing disruption from COVID-19. However, these rules don’t change other regulations that limit capital distributions or discretionary bonuses.

Keep Up To Date On COVID-19 And Its Impact On Financial Institutions
As COVID-19 continues to impact the way we do business, there is still much to come. Financial institutions should stay up to date on guidance concerning these changes, including loan modification to borrowers.

Need help understanding COVID-19’s impact on your financial institution?

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