Bank CFO Update: Comments Regarding Recent Regulatory Guidance on Loan Modifications

8/18/2020 - By Paul Allen, CPA

Reference: Interagency Statement dated April 7, 2020; FFIEC Joint Statement on Additional Loan Accommodations related to COVID-19 dated August 3, 2020; OCC Reference Guide: TDR Designation and COVID-19 Loan Modifications (Section 4013 of CARES Act and OCC Bulletin 2020-35)

With all the attention on PPP loan origination and forgiveness, the issue of how to account for loan modifications has been left simmering on a back burner, with most banks simply referring to the April 7th Interagency Statement allowing short-term (six months or less) loan modifications related to COVID as the primary guidance. However, loan modifications in a broader sense were specifically addressed in the CARES Act under Section 4013; interestingly, that guidance was silent on the length of such a modification.

In recent weeks, two regulatory releases provided helpful and practical guidance for community bankers already thinking about how best to consider the proper loan credit grade for loans impacted by COVID, and how to document and treat various types of loan modifications with respect to the existing definitions of troubled debt restructuring (TDR).

The August 3rd FFIEC guidance clearly set forth the regulatory guidance that banks were expected to reassess the loan credit grade on loans impacted by COVID, whether or not a modification had occurred, but that a COVID-related modification should not, in and off itself, cause a loan to be downgraded. Additionally, the guidance addressed the need for bank management teams to continually monitor the borrower’s condition and creditworthiness considering the economic uncertainty and stress related to the pandemic, and that the level of loan loss reserves should consider these issues in the qualitative factors of the Allowance for Loan Losses (ALLL), regardless of whether the bank has adopted CECL yet or not.

Bulletin 2020-35 issued by the OCC includes a decision flowchart which provides a straightforward and helpful guide to determine whether a loan modification should be classified and accounted for as a TDR. The flowchart differentiates between loan modifications made under Section 4013 of the CARES Act or under the guidance in the April 2020 Interagency Statement. Generally, loan modifications made under either the CARES Act or the Interagency Statement for borrowers adversely impacted by COVID are not required to be reported or accounted for as TDRs. The OCC guidance is also helpful in assisting the Management team determine the correct accounting and reporting for a loan modification made under Section 4013, after a shorter modification had been made under the Interagency Guidance.

Please note that the regulatory agencies have advised banks that documentation and records should be maintained about the volume (generally, the number of loans and the outstanding principal amount) of section 4013 loans, and that data may be collected by the agencies for supervisory purposes (refer also to the June 2020 Supplemental Instructions to the Call Report).

We encourage community bank CFO’s to review and discuss the recent guidance with their Senior Management teams, and in particular, recommend banks clearly identify loan modifications which are granted due to COVID and to document in the individual loan files whether the modification is made under the CARES Act Section 4013, or the Interagency Statement, or if made for other business reasons.

Please contact us if you have questions and continue to check our COVID-19 RESOURCE HUB for sources of information and updates.

About the Author | Paul Allen, CPA
Paul is a shareholder in the Financial Institution Advisory Group of Saltmarsh, Cleaveland & Gund and the shareholder in charge of our Orlando office. He has over 25 years of public accounting and senior management experience, primarily serving financial institutions. Prior to joining Saltmarsh, Paul worked with an international accounting firm and served in various senior management roles with several financial institutions, including Chief Financial Officer.