The same day, FDIC Chairman Jelena McWilliams urged the Financial Accounting Standards Board (FASB) to exclude modifications related to coronavirus-related issues from being considered a concession when determining a TDR. She said that while the FDIC has encouraged institutions to work with affected borrowers, institutions are worried about a modification being classified as a TDR in FASB’s view.
“Based on our initial review of the letter, we agree with the need for close coordination with the SEC and banking regulators to address issues associated with loan modifications,” said FASB spokeswoman Christine Klimek in an email statement to Abrigo. She did not have an estimated timeline for announcing how to address the issues.
A decision on this issue will be critical for lenders. Camp said if loans are determined to be TDRs, financial institutions still calculating the allowance for loan and lease losses under the incurred loss method will, of course, be required to consider the loan impaired for allowance purposes. Valuation and measurement of required reserves for the impaired loans can be cumbersome if a financial institution is handling those processes manually, Camp notes.
“Consider what automated options you have,” he says. “Now might be a good time to ramp up your capacity knowing that the effects of this are coming. There are many other benefits to automation anyway, but let this be a catalyst to convincing internal management that it’s a good idea to automate the allowance.”