Frequently Asked Questions About Troubled Debt Restructurings Under the CARES Act and Interagency Statement (April 15, 2020; Last Updated January 11, 2021)

What are the main differences between the TDR guidance in Section 4013 of the CARES Act and the TDR guidance in the interagency statement?

Differences are outlined in the following table:

Question 2

What are some similarities between the TDR guidance in Section 4013 of the CARES Act and the TDR guidance in the interagency statement?

Similarities include the following:

• Both Section 4013 of the CARES Act and the interagency statement apply only to modifications that are related to the COVID-19 pandemic. Neither the CARES Act nor the interagency statement provides specific guidance on whether a modification is related to the COVID-19 pandemic, although the interagency statement does imply that COVID-19-related modifications that are made in accordance with a modification program would be considered COVID-19-related. In the absence of specific guidance, entities may need to use judgment to determine whether modifications were made directly in response to the COVID-19 pandemic or for other reasons. We generally would not expect differences between the scope or application of the CARES Act and the interagency statement to be the result of different interpretations of whether a modification is the result of the COVID-19 pandemic. That is, a modification program that is related to COVID-19 under Section 4013 of the CARES Act would be expected also to be related to COVID-19 under the interagency statement, and vice versa.
  During its April 24, 2020, webcast, “Ask the Regulators: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus” (the “Agencies’ webcast”), staff members of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the “Agency staff”) reiterated the need for entities to use reasonable judgment when determining whether modifications are COVID-19- related. The Agency staff further indicated that entities in certain industries that may have been experiencing the negative effects of economic conditions before COVID-19 (e.g., energy or oil and gas entities) are not required to reach a conclusion that a modification is predominantly COVID-19-related. Rather, entities making modifications can consider the fact that the COVID-19 pandemic is affecting all entities. [Paragraph amended April 24, 2020]
• Both Section 4013 of the CARES Act and the interagency statement can be applied to a second modification that occurs after the first modification provided that the second modification does not qualify as a TDR under Section 4013 of the CARES Act or the interagency statement. During the Agencies’ webcast, the Agency staff gave an example of a short-term payment deferral (e.g., a three-month deferral of payments of principal and interest) that is accompanied by another payment deferral after the end of the first payment deferral period because the borrower was unable to resume making payments at the end of the first payment-deferral period. The Agency staff indicated that this second modification may not be a TDR if the modification qualifies under Section 4013 of the CARES Act or the interagency statement. In its evaluation of whether a payment deferral qualifies as short-term under the interagency statement, an entity should assess multiple payment deferrals collectively (i.e., the cumulative deferrals cannot exceed six months). [Paragraph added April 24, 2020]
• An entity is not required to have adopted the FASB’s current expected credit losses (CECL) standard (ASU 2016-137) under either Section 4013 of the CARES Act or the interagency statement. Therefore, the TDR guidance under both may apply irrespective of whether an entity has adopted the CECL standard or continues to apply the incurred loss model in ASC 310-10.8
• Application of Section 4013 of the CARES Act or the interagency statement does not depend on the type of loan being modified (e.g., commercial vs. consumer, mortgage loan vs. personal loan).
• For loan modifications subject to either Section 4013 of the CARES Act or the interagency statement, the TDR guidance applies for the duration of the modification (i.e., the loan would not be designated a TDR through the duration of its remaining term). However, any loan modifications that are made after the initial modification would require evaluation under ASC 310-40 unless the subsequent modification meets the conditions in Section 4013 of the CARES Act or the interagency statement.
• For loan modifications that are not TDRs under either Section 4013 of the CARES Act or the interagency statement, the lender is not required to apply the accounting or disclosure requirements in ASC 310-40 that apply to TDRs.

Question 2A

Can the TDR guidance in Section 4013 of the CARES Act be applied if an entity makes an interest rate modification to a loan?

Section 4013(b)(2) of the CARES Act specifically refers to “an interest rate modification” that is made as a result of an adverse impact on the credit of a borrower that was related to COVID-19. Thus, an entity may choose to reduce the interest rate on a loan for a specified period as opposed to forbearing all payments during a specified period. As long as such a modification is made in response to the COVID-19 pandemic, it would be appropriate to not account for it as a TDR under Section 4013 of the CARES Act. However, an entity that modifies a loan to reduce the interest rate for the loan’s remaining contractual term must determine whether that modification is directly related to the COVID-19 pandemic. The entity’s conclusion may depend on the remaining term of the loan. For example, if the loan’s remaining term is short (e.g., less than one year), the modification may be considered directly related to the COVID-19 pandemic. In other situations, consultation with the entity’s legal counsel is encouraged.

Can the TDR guidance in the interagency statement be applied if an entity makes an interest rate modification to a loan?

The interagency statement only refers to “short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant.” As discussed in Question 16, the interagency statement may be applied to short-term payment deferrals whether or not the entity charges interest on the deferred payments. Any modification that involves the deferral of payments of principal and interest for a short-term period, without the accrual of interest on such deferred payments, is effectively a modification of the interest rate terms on the loan. If, in lieu of deferring all payments of interest, an entity reduced the contractual interest rate for a short-term period (i.e., six months or less), it would be reasonable not to account for such a modification as a TDR provided that (1) the borrower was less than 30 days past due as of the date the modification program was implemented and (2) the short-term interest reduction was related to COVID-19.

Should an entity evaluate whether modified loans that are not considered TDRs under Section 4013 of the CARES Act or the interagency statement represent new loans for accounting purposes?9

Yes. ASC 310-20-35-9 through 35-1110 provide guidance on whether, as a result of a loan refinancing or restructuring, a modified loan represents a “new loan” for accounting purposes. For modifications of loans that require “new loan accounting,” any unamortized net fees or costs and any prepayment penalties from the original loan must be recognized in interest income, and the modified loan must be initially recognized at fair value. However, if new loan accounting is not required, unless fees are received in connection with the modification, there would be no change in the net carrying amount of the loan as a result of the modification.

Under ASC 310-20-35-9 through 35-11, a modification results in a new loan for accounting purposes only if all the following conditions are met:

• The modification is not a TDR.
• The terms of the modified loan are at least as favorable to the lender as the terms of comparable loans to other customers with similar collection risks that are not refinancing or restructuring a loan with the lender. (This condition would be met if the modified loan’s effective yield is at least equal to the effective yield for such newly originated loans.)
• The modification is more than minor (i.e., the present value of the cash flows under the modified terms is at least 10 percent different from the present value of the remaining cash flows under the original terms, or the specific facts and circumstances otherwise suggest that the modification is more than minor).

We would generally expect that loan modifications subject to the TDR guidance in Section 4013 of the CARES Act or the interagency statement would not represent new loans for accounting purposes. Without performing a present-value calculation, a lender can appropriately determine that new loan accounting is not required on the basis of a conclusion that the terms of the modified loan are less favorable than the terms of newly originated loans that would be provided to borrowers that are not subject to the modification. We expect this conclusion to be reached in most cases since these types of modifications arise from the economic difficulties associated with COVID-19.

Should an entity continue to recognize an allowance for credit losses on modified loans that are not accounted for as TDRs as a result of Section 4013 of the CARES Act or the interagency statement?

Yes. Entities that grant loan modifications that are not accounted for as TDRs as a result of either Section 4013 of the CARES Act or the interagency statement must still recognize appropriate allowances for credit losses. It would not be necessary for an entity to apply a discounted cash flow model to reflect an impairment loss related to the time value of money “loss” for loan modifications that involve only payment deferrals. However, entities that have adopted ASU 2016-13 as well as those that have not should consider the increased economic uncertainty associated with the COVID-19 pandemic and any change in credit risk that results from loan modifications.

May an entity continue to recognize interest income on modified loans that are not accounted for as TDRs as a result of Section 4013 of the CARES Act or the interagency statement if interest does not accrue on deferred payment obligations of the borrower?

Answer

It depends. ASC 310-20-35-18(a) prohibits the recognition of interest income to the extent that the net carrying amount of a loan exceeds the amount for which the borrower could prepay it without penalty. However, at the FASB’s meeting on April 8, 2020, the FASB staff responded to a technical inquiry by indicating that entities may reasonably interpret this guidance in U.S. GAAP in two ways:

• The limitation described in ASC 310-20-35-18(a) applies when a lender provides a forbearance (i.e., payment deferral).
• ASC 310-20-35-18(a) does not apply to such a forbearance.

An entity that chooses to apply ASC 310-20-35-18(a) would generally conclude that interest income is not recognizable on modified loans that do not accrue interest during the payment deferral period. An entity that chooses not to apply ASC 310-20-35-18(a) would recognize interest income (at a modified effective rate) but would consider whether the loan should be placed on nonaccrual status (see Question 6). An entity that chooses not to apply ASC 310-20-35-18(a) is not required to estimate prepayments in determining the effective yield; however, estimated prepayments must be considered in the calculation of the allowance for credit losses for entities that have adopted ASU 2016-13. Prepayments are included in the calculation of the effective yield used to recognize interest income only when the guidance in ASC 310-20-35-26 through 35-32 is applied.

Under both alternatives, except for loans that are classified as held for sale, lenders will generally need to recalculate the loan’s effective yield. A recalculation is necessary for lenders to apply the interest method during the deferral period and thereafter (i.e., when they do not apply the limitation under ASC 310-20-35-18(a)). This effective yield recalculation must take into account the payment deferral and any unamortized discounts or premiums. Such calculations may be complex for loans with variable interest rates. An entity that chooses to apply ASC 310-20-35-18(a) would not accrue contractual interest payments during the deferral period but would continue to amortize any discounts or premiums. Once the deferral period ends, the entity would need to recalculate the effective yield to apply the interest method. Question 15 in Topic 2B of the Office of the Comptroller of the Currency’s Bank Accounting Advisory Series provides relevant guidance to consider once a nonaccrual loan returns to accrual status. That guidance states, in part:

Interest income on loans classified as held for sale is generally recognized on the basis of the contractually stated coupon.

Although the FASB staff’s response to the technical inquiry addressed a specific fact pattern, we understand from informal discussions with the staff that its intention was to establish an accounting model that applies broadly to all loans that are modified to incorporate payment deferrals. (Note that this interpretation does not apply to loans that are originated with an introductory payment deferral or modified loans that are treated as new loans under ASC 310-20.) The election of either of the two interpretations constitutes an accounting policy decision that must be applied consistently to all loans that are modified to incorporate payment deferrals. While some entities may have already elected an accounting policy (i.e., entities that had a preexisting accounting policy that addressed similar situations encountered in prior reporting periods), those that have not yet done so will need to make their election in the first financial statements that (1) include payment deferral modifications and (2) are issued after the FASB staff’s response to the technical inquiry. In accordance with ASC 235,11 entities should also disclose the elected accounting policy and consider providing additional information about the amounts of interest accrued.

Note also that an entity that accrues interest under the second alternative discussed above must appropriately recognize an allowance for credit losses on the accrued interest amounts. Such an allowance can be measured separately for accrued interest receivable amounts or measured as part of the total carrying amount of the related loans. Some entities that have adopted ASU 2016-13 have elected, as an accounting policy, not to measure an allowance for credit losses on accrued interest receivable amounts because they write off the uncollectible accrued interest receivable balances in a timely manner. These entities would generally still need to recognize an allowance for credit losses on accrued interest amounts that result from deferred payments because those amounts would not be considered to be written off in a timely manner.

The AICPA has issued a technical question and answer that provides additional considerations related to loan restructurings that result in periods of reduced payments.

The above guidance may not be applied by borrowers.

Should an entity evaluate the need to report as nonaccrual assets modified loans that are not accounted for as TDRs as a result of Section 4013 of the CARES Act or the interagency statement?

Yes. The interagency statement states, in part:

While this guidance indicates that a regulated lender would not be required to report a loan as a nonaccrual asset as a result of modifications made under short-term deferral programs in which the borrower was not 30 days or more past due as of the date on which the program was implemented, it does not imply that all modified loans that are not accounted for as TDRs under Section 4013 of the CARES Act or the interagency statement should be reported as accrual assets. Rather, entities should apply their existing nonaccrual policies to determine whether loans must be reported as accrual assets. In applying such policies, entities will need to take into account that the past-due status of a loan may be temporarily “frozen” as a result of contractual changes to minimum monthly payments. Examples of situations that may result in the need to report a modified loan as a nonaccrual asset even though the modification is not accounted for as a TDR may include:12

• Loans for which the borrower declares bankruptcy after the loan modification.
• Loans for which borrower-specific information indicates that a significant deterioration in the borrower’s credit has occurred after the loan modification and such deterioration results in a conclusion that the lender does not expect to collect all principal and interest due.
• Modifications of loans that were current as of December 31, 2019, but were 90 days past due as of the date on which the entity implemented a loan modification program.

Note that while past-due status is considered in the determination of whether a loan represents a nonaccrual asset or should be charged off, it is not the only consideration. That is, a loan that is less than a certain number of days past due is not automatically an accruing asset. [Paragraph added May 1, 2020]

How do payment deferrals affect the past-due status of modified loans that are not accounted for as TDRs under Section 4013 of the CARES Act or the interagency statement during the payment deferral period?

The past-due status of a loan is generally determined on the basis of the contractual terms of the loan. Once a loan has been contractually modified to defer payments, those revised terms represent the contractual terms that are used to determine past-due status. This is acknowledged as follows in the interagency statement:

In accordance with this guidance, for modifications that are not accounted for as TDRs because of the interagency statement, since the loan was current (i.e., less than 30 days past due) as of the date on which the program to defer principal and interest payments was implemented, the loan would remain classified as current during the deferral period.

In the Agencies’ webcast, the Agency staff reiterated that the past-due status of a loan is generally determined on the basis of the contractual terms of the loan after any modification to the loan’s terms. The Agency staff further indicated that loans that were current before COVID-19 would generally remain current after being modified to defer payments of principal and interest (assuming that those modifications are not accounted for as TDRs). However, the Agency staff provided an example of a loan that was 60 days past due before the COVID-19 pandemic and indicated that the past-due status would be “frozen” as of the date on which the terms were modified to reflect the delinquency status of the loan before the COVID-19 pandemic. (In the Agency staff’s example, the loan had not been charged-off.) We believe that this example was intended to address modifications that are not accounted for as TDRs under Section 4013 of the CARES Act. We would expect that a modification that is not a TDR under the interagency statement would remain current after being modified, which is consistent with the loan’s delinquency status as of the date of an entity’s modification program. For modified loans that are not considered TDRs under Section 4013 of the CARES Act, we believe that entities must use judgment to determine the past-due status, which will be “frozen” during the deferral period. We believe that lenders could determine the past-due status of modified loans that are not treated as TDRs under Section 4013 of the CARES Act by using any of the following approaches provided that the approach used is applied consistently:

• Past-due status is determined as of March 1, 2020 (i.e., the first date on which modifications may qualify for the TDR guidance in Section 4013 of the CARES Act). Under this approach, it is assumed that the COVID-19 pandemic began to affect a borrower’s ability to make payments on March 1, 2020.
• Past-due status is determined as of the date on which an entity’s modification program is implemented. Under this approach, it is assumed that the COVID-19 pandemic began to affect a borrower’s ability to make payments on the implementation date of the entity’s modification program. This approach aligns the past-due status with how such status is determined for modifications that are not treated as TDRs under the interagency statement.
• Past-due status is determined as of the modification date. Under this approach, an entity does not try to identify a specific date on which the COVID-19 pandemic began to affect a borrower’s ability to make payments. [Paragraph added April 24, 2020; amended May 1, 2020]

Note that an entity should not rely solely on a loan’s delinquency status in determining that the loan is not a nonaccrual asset (see Question 6). [Paragraph added April 24, 2020]

What incremental disclosures should an entity provide for loan modifications that are not accounted for as TDRs under Section 4013 of the CARES Act or the interagency statement?

Entities will need to use judgment to determine which incremental disclosures to provide to describe the impact that loan modifications that are not accounted for as TDRs have had or may have on an entity’s financial conditions and results of operations. Although modified loans may still represent current loans, entities may find it necessary to supplement existing credit-quality disclosures and other related disclosures, including ratios, to discuss modified loans that are not accounted for as TDRs. Supplemental disclosures may be made in both the notes to the financial statements and, for SEC registrants, in MD&A. On the basis of informal discussions with the SEC’s Division of Corporation Finance, we believe that many of the suggested disclosures about loan modifications that were discussed in a speech made in December 2010 would be relevant disclosures for loan modifications related to COVID-19.

Entities that apply Section 4013 of the CARES Act or the guidance in the interagency statement should update their accounting policy disclosures under ASC 235 to describe how the application of Section 4013 of the CARES Act or the guidance in the interagency statement affected their determination of whether COVID-19 modifications were accounted for as TDRs. [Paragraph added May 1, 2020]

Must a financial institution apply Section 4013 of the CARES Act?

No. Section 4013(b)(1) states that a financial institution “may elect” to apply the guidance in Section 4013 of the CARES Act. Financial institutions that elect to apply Section 4013 of the CARES Act will be in compliance with U.S. GAAP as indicated in the April 3, 2020, statement issued by SEC Chief Accountant Sagar Teotia.

We would expect that a financial institution that elects to apply Section 4013 of the CARES Act on an entity-wide basis to all modifications that qualify for non-TDR treatment under Section 4013 of the CARES Act would do so in the first financial statements issued after enactment of the CARES Act. For example, a calendar-year financial institution that is an SEC registrant would need to make its election in the first-quarter financial statements included in its Form 10-Q quarterly report. However, as discussed in Question 10 below, an entity can elect to apply Section 4013 of the CARES Act on a basis other than entity-wide. [Paragraph last amended May 1, 2020]

Question 10

Should a financial institution’s election to apply Section 4013 of the CARES Act be made on an entity-wide basis?

During the Agencies’ webcast, the Agency staff indicated that entities may apply Section 4013 of the CARES Act on an entity-wide basis, on a product-type basis, or on a loan-by-loan basis. If a financial institution chooses to apply Section 4013 of the CARES Act to some, but not all, modifications that qualify for non-TDR treatment under Section 4013 of the CARES Act, the entity should ensure that its footnote disclosures appropriately describe the modifications to which such guidance applies as well as those to which it does not. [Paragraph last amended May 1, 2020]

Questions may arise regarding the application of Section 4013 of the CARES Act in circumstances in which a parent entity is not a financial institution but a consolidated subsidiary of the parent is such an institution. In these situations, consultation with the entity’s legal counsel and independent accountants is encouraged.

Does the TDR guidance in the interagency statement apply to a financial institution that adopts the TDR guidance in Section 4013 of the CARES Act?

Answer

Yes. The interagency statement addresses this question. See Appendix B of this Heads Up for an excerpt of the TDR accounting and disclosure guidance in the interagency statement. See Appendix D for a flowchart illustrating the application of the guidance in Section 4013 of the CARES Act and the interagency statement. [Paragraph amended May 1, 2020]

Question 12

Are entities that are regulated by the Agencies that issued the interagency statement required to adopt the TDR guidance in the interagency statement?

We believe that the TDR guidance should be applied for regulatory reporting purposes. Regulatory accounting principles generally do not conflict with (or differ from) U.S. GAAP. Therefore, we would expect that entities would apply the TDR guidance for regulatory reporting purposes as well as in their financial statements prepared under U.S. GAAP. However, on the basis of informal discussions, we understand that the Agency staff intended to allow flexibility regarding a regulated entity’s application of the interagency statement. That is, it may be appropriate for a regulated entity to apply the TDR guidance in the interagency statement only to certain modification programs. Consultation with an entity’s banking regulator and independent accountants is encouraged in any circumstance in which a regulated entity chooses not to apply the TDR guidance in the interagency statement for regulatory reporting or U.S. GAAP purposes. [Paragraph amended May 1, 2020]

Furthermore, if a regulated entity chooses to apply the interagency statement to some, but not all, modifications that qualify for non-TDR treatment under the interagency statement, the entity should ensure that its footnote disclosures appropriately describe the modifications to which such guidance applies as well as those to which it does not. Note that the application of the TDR guidance in the interagency statement is considered an appropriate application of ASC 310-40, as indicated in the FASB’s March 22, 2020, statement. [Paragraph amended May 1, 2020]

Question 13

May entities that are regulated by the Agencies adopt the TDR guidance in the interagency statement on a loan-type or loan-by-loan basis?

As discussed in Question 12 above, we believe that entities that are regulated by the Agencies should generally adopt the TDR guidance in the interagency statement and apply it to all eligible loans.

Note that this question was not directly addressed during the Agencies’ webcast. However, on the basis of informal discussions with the Agency staff, we understand that application of the interagency statement was intended to be flexible. See further discussion in Question 12. [Paragraph added April 24, 2020; amended May 1, 2020]

Are entities that are not regulated by the Agencies eligible to apply the TDR guidance in the interagency statement?

Yes. As discussed in Question 12, the FASB has determined that the TDR guidance in the interagency statement is an appropriate application of ASC 310-40. Therefore, entities that are not regulated by the Agencies are eligible to apply the TDR guidance in the interagency statement. Generally, we would expect such guidance to be applied as an entity-wide accounting policy (i.e., to all modifications that qualify for non-TDR treatment under the interagency statement) rather than on a loan-type or loan-by-loan basis. However, see Question 12 for further discussion. Consultation with an entity’s independent accountants is encouraged in any circumstance in which an entity that is not regulated by the Agencies wishes to apply the TDR guidance in the interagency statement on a loan-type or loan-by-loan basis. [Paragraph amended May 1, 2020]

May a payment deferral in excess of six months be considered a “short-term” modification under the interagency statement?

No. On the basis of informal discussions with the Agency staff, we believe that entities that grant payment deferrals in excess of six months should not be considered “short-term” under the TDR guidance in the interagency statement. However, such modifications may still not be accounted for as TDRs if Section 4013 of the CARES Act applies, the modification is the result of a government-mandated modification related to the COVID-19 pandemic, or the modification otherwise does not represent a TDR under ASC 310-40 because the borrower is not experiencing financial difficulty.

During the Agencies’ webcast, the Agency staff indicated that a payment deferral that does not exceed six months may be considered a “short-term” modification under the interagency statement regardless of the remaining term of the loan on the modification date. [Paragraph added April 24, 2020]

In determining whether a payment deferral is short-term, a lender must take into account both past-due and future payments that are deferred. For example, assume that an entity implements a loan modification program on March 15, 2020. Under the program, a deferral of up to six future monthly payments due is permitted. Assume that a borrower was less than 30 days past due on the March 15, 2020, implementation date of the program; however, the modification of the loan occurs in May 2020 when the borrower was 60 days past due (i.e., it had not made its March 1 and April 1 monthly payments). If the lender grants a payment deferral that involves the two missed monthly payments and the next six months of payments (i.e., the next required monthly payment is due on November 1, 2020), the deferral would not be considered short-term under the interagency statement because it involves the deferral of eight monthly payments. The lender could, however, defer the two missed monthly payments and the next four monthly payments due (i.e., the next required monthly payment is due on September 1, 2020) and meet the conditions in the interagency statement for not treating the modification as a TDR. [Paragraph added May 1, 2020]

Is a payment deferral of up to six months considered a “short-term” modification if the entity adds the deferred payments to the end of original stated maturity date of the loan (i.e., those payments become due more than six months from the date of the modification)?

Answer

On the basis of informal discussions with the Agency staff, we believe that entities that modify loans to defer payments for up to six months may add those payments to the end of the original loan term and consider the modification to be “short-term” even if those deferred payments become contractually due more than six months from the date of the modification.13 Alternatively, an entity could “spread” those deferred payments over the remaining original term of the loan. In either case, entities may or may not charge interest on the deferred payments and still be considered to have entered into a short-term payment deferral and therefore qualify for the TDR guidance in the interagency statement. However, we generally do not believe that the TDR guidance in the interagency statement would apply if an entity adds the deferred payments over an unreasonable extended period after the original stated maturity date of the loan (i.e., a period after the original stated maturity that exceeds the period of deferral plus a reasonable period to take into account any interest that accrues during the deferral period). For example, assume that an entity defers six $1,000 monthly payments on a mortgage loan and continues to accrue interest on the deferred payments. To ensure that the payments added to the end of the loan do not exceed the $1,000 monthly payment amount, the entity adds eight $1,000 monthly payments to the end of the loan. (Assume that the additional two months happens to equal the additional accrued interest.) This type of modification would qualify as short-term under the interagency statement. Alternatively, if the entity added 36 monthly payments of $250 to the end of the original loan term, the modification does not appear to be short-term as envisioned by the interagency statement. However, such modification might qualify under the TDR guidance in Section 4013 of the CARES Act.

What is meant by a loan modification “program”?

Answer

The interagency statement does not define the term “program.” However, the background discussion provides relevant information that may help an entity determine what constitutes a loan modification program (i.e., it describes the intent of the prudent workout efforts that are recommended by the Agencies). Although an entity must use judgment, we would generally expect that any arrangement that applies broadly to a population of loans with similar characteristics (e.g., loan type, geographic location of the borrower, type of borrower) would qualify as a program. Alternatively, an entity could develop a single program that applies to all loans that it originated. Since loss-mitigation efforts are made on the basis of an entity’s credit risk management policies and procedures, there is significant flexibility associated with how an entity designs modification arrangements to align with its risk management appetite. Thus, an entity may use significant discretion in determining what constitutes a loan modification program.

During the Agencies’ webcast, the Agency staff indicated that it intended to give entities flexibility in determining what constitutes a modification program. [Paragraph added April 24, 2020]

Would an entity’s changes to a previously implemented loan modification program represent a new modification program?

It depends. For example, assume that an entity has made payment deferrals of up to six months under a program and subsequently amends that program so that payment deferrals may not exceed three months (but does not change loans that were previously modified to defer payments for up to six months). In this example, it may be acceptable to view the change either as a new program or as a refinement of the previously implemented program. Entities will need to consider the reasons for a change to a loan modification program and use judgment to determine whether the change represents a new program. In applying judgment, entities should consider whether the revised modification program fits into the parameters of the original modification program. If it does not, the revised modification program would most likely be considered a new modification program.

What is meant by the comment in the interagency statement that “borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented” (emphasis added)?

Entities will need to use judgment to determine when a loan modification program has been implemented. On the basis of informal discussions with the Agency staff, we believe that the time of implementation may depend on when the modification was announced publicly or when it was approved by those within an entity with the appropriate level of authority to approve such a program. Other approaches may also be acceptable. Entities should maintain documentation supporting their determination of the implementation date of each loan modification program.

May the TDR guidance in the interagency statement be applied to a modification that is individually negotiated and designed to address an individual borrower’s situation?

Yes. The TDR guidance in the interagency statement was written in the context of a modification that is made in accordance with a loan modification program. Some loan modification programs may contain general parameters but give entities some level of discretion in assessing each borrower’s specific facts and circumstances. Such arrangements would be considered to represent changes made under a loan modification program. In other situations, an entity may negotiate a modification with an individual borrower to address specific facts and circumstances associated with that borrower. In such situations, the TDR guidance in the interagency statement may be applied if the modification is COVID-19-related; however, the evaluation of whether the borrower was current would need to be made on the modification date since the modification was not made in accordance with a broader modification program. [Paragraph amended April 24, 2020]

Question 21

May an entity determine the status of a borrower as current (i.e., less than 30 days past due) or noncurrent as of the date on which each modification is made in accordance with a loan modification program?

No. The interagency statement indicates that the TDR guidance applies if “the borrower was current on payments at the time the modification program is implemented” (emphasis added). Therefore, the payment status of the borrower must be determined as of the date of the program’s implementation, not as of the date on which each individual modification under the program is made. However, an entity could design a program that applies only to borrowers that are current as of the date on which the loan modifications are made. In this circumstance, borrowers would be eligible to take advantage of the modification program only if they were current as of the modification date. To apply the TDR guidance in the interagency statement, the borrower would still need to be current as of the date of the loan modification program’s implementation. That being said, borrowers that are current as of the date of the modification would often have also been current as of the date on which the loan modification program was implemented. See also Question 20.

What is an example of a government-mandated modification or deferral program related to COVID-19?

Under Section 4022 of the CARES Act, through the earlier of the termination date of the COVID-19 emergency or December 31, 2020, a borrower with a federally backed mortgage loan (e.g., a loan insured or guaranteed by the Federal Housing Authority, Department of Veterans Affairs, Department of Agriculture, Federal Home Loan Mortgage Corporation, or Federal National Mortgage Association) that is experiencing a financial hardship due to COVID-19 may request a forbearance (i.e., payment deferral), regardless of delinquency status, for up to 180 days, which must be extended for an additional 180 days at the borrower’s request.

Under Section 4023 of the CARES Act, a multifamily borrower with a federally backed multifamily mortgage loan (e.g., a mortgage loan on residential multifamily real property that is insured or guaranteed by any agent of the federal government, the Federal Home Loan Mortgage Corporation, or the Federal National Mortgage Association) that was current as of February 1, 2020, and is experiencing a financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, which may be extended for up to two additional 30-day periods at the borrower’s request. [Paragraph amended January 11, 2021]

Both payment delay programs would be considered government-mandated. Therefore, the payment deferrals provided for under Section 4022 of the CARES Act would not represent TDRs under the interagency statement even though borrowers may request deferrals for up to 360 days.