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Guidance on TDRs Eases Coronavirus Workout Pressures

Mary Ellen Biery
March 25, 2020
Read Time: 0 min

This post was updated on May 12, 2020 to include findings from the Abrigo survey, "State of the Financial Services Industry: Feedback Survey."

Federal and state banking regulators have announced several moves that will make it easier for banks and credit unions to offer short-term relief to borrowers affected by the Coronavirus Disease 2019, or COVID-19, crisis.

Chief among the moves: Agreeing not to direct financial institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs), and confirming with the Financial Accounting Standards Board (FASB) that short-term modifications in response to COVID-19 made in good faith to borrowers who were current prior to any relief aren’t classified as TDRs. The distinction is important because labeling modifications as TDRs triggers additional accounting and reporting requirements for most financial institutions. In a recent Abrigo survey, "State of the Financial Services Industry: Feedback Survey," nearly three out of four (71.2%) of financial institutions responded saying that they were concerned about the amount of loan workouts it had to manage.

Modifications not automatically TDRs

In a joint statement March 22, the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and state banking regulators said the following modifications can be offered for up to six months without being considered TDRs:

  • Payment deferrals
  • Fee waivers
  • Extensions of repayment terms or
  • Other delays in payment that are insignificant

Borrowers must be current, defined as less than 30 days past due on their contractual payments, at the time a modification program is implemented.

“Working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs,” the agencies said. “For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.”

The FASB issued a brief statement saying the guidance was developed in consultation with the accounting standard-setter's staff, "who concur with this approach and stand ready to assist stakeholders with any questions they may have during this time."


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‘Can-kicking is the right action’

Garver Moore, Managing Director of Abrigo Advisory Services, said the regulators’ statement provided helpful communication for community financial institutions and their borrowers and members during the responsive phase of the pandemic.

“When we talk about ‘kicking the can down the road,’ we usually mean it’s time to pick up the can now,” Moore said. “In cases like this, can-kicking is the right action. To be clear, many businesses will never be able to recover from this, and many will require more than temporary restructures of their debt in order to survive.”

The statement isn’t communicating that the pandemic cannot cause a TDR, he noted. It is communicating that “broad and acute actions,” such as a 90-day forbearance or interest-only periods, do not create a TDR.

However, the guidance will make it more palatable for financial institutions seeking to help borrowers during the coronavirus crisis, and it was sought by bankers, including the Independent Community Bankers of America (ICBA). The FDIC chairman had earlier asked FASB to exclude coronavirus-related modifications from being labeled a concession when determining a TDR, saying that while regulators encouraged working with borrowers, institutions worried modifications would trigger a TDR classification.

Among the challenges associated with loan workouts, three out of four financial institutions (71.4%) reported that maintaining appropriate ALLL or allowance for credit loss as applicable for loan modifications is a top concern, according to the Abrigo survey. Loans determined to be TDRs are considered impaired for allowance purposes under the incurred loss method for calculating the allowance for loan and lease losses, triggering additional accounting and reporting requirements for financial institutions still reporting the ALLL under the legacy accounting standard. Meanwhile, financial institutions estimating losses under the current expected credit loss standard, or CECL, are required to factor in expectations of TDRs when considering the expected life of an asset. They should factor in not only whether a TDR is reasonably expected, but also the anticipated terms of modification as well as how those might affect assumptions of the CECL model.

Regulators said they view loan workouts as positive actions that can mitigate adverse effects on borrowers, adding that they will not criticize institutions that “mitigate credit risk through prudent actions consistent with safe and sound practices.”

“The agencies consider such proactive actions to be in the best interest of institutions, their borrowers, and the economy,” regulators said. “The agencies also will not criticize institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.”

Past-due reporting under deferral programs

Examiners will not automatically adversely risk rate credits affected by COVID-19, including those considered TDRs, but will exercise judgment in reviewing loan modifications. And if a financial institution agrees to a payment deferral on a loan not otherwise reportable as past due, the loan wouldn’t be considered past due during the payment-deferral period. In addition, efforts to work with residential mortgage borrowers will not result in loans being considered restructured or modified for purposes of institutions’ risk-based capital rules, as long as loans are prudently underwritten and are not past due or carried in nonaccrual status, said the FDIC, the Fed, and the OCC.

Finally, regulators reminded institutions that loans restructured according to the guidance will continue to be eligible as collateral under the Fed’s discount window based on the usual criteria.

About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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