On April 7, 2020, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation, the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the State Banking Regulators issued a revised interagency statement to provide financial reporting information to financial institutions that are working with borrowers affected by the coronavirus (COVID-19). This revised interagency statement expands upon and clarifies certain guidance contained in the initial interagency statement issued on March 22, 2020. Specifically, the revised interagency statement addresses certain differences between modification accounting under the initial interagency statement and the provisions of section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed into law on March 27, 2020.
With respect to the accounting for loan modifications, the agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief are not troubled debt restructurings (TDRs) as defined in Subtopic 310-40, "Receivables – Troubled Debt Restructurings by Creditors," of the FASB's Accounting Standards Codification (ASC). Per the initial interagency statement, this included short-term (e.g., six-month) modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant for borrowers that were considered current (less than 30 days past due on their contractual payments) at the time the modification program was implemented.
Under section 4013 of the CARES Act, a loan modification for which a financial institution may elect to suspend application of ASC 310-40 is defined as a modification that has the following conditions:
- Executed in response to adverse impact on the credit of the borrower that was related to COVID-19 (and not any other factors);
- Executed on a loan that was not more than 30 days past due as of December 31, 2019; and
- Executed between March 1, 2020 and the earlier of 60 days after termination of the National Emergency or December 31, 2020.
The interagency statement discusses that 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. 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. Also, modification or deferral programs mandated by the federal or a state government related to COVID-19 (e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period) would not be in the scope of ASC 310-40.
In addition to information on the accounting for loan modifications, the interagency statement also includes information regarding the effects of the coronavirus as it relates to:
- Working with customers
- Past due reporting
- Nonaccrual status and charge-offs
- Eligibility of loans as collateral at the FRB's discount window
The FASB has issued a release indicating its agreement with the interagency interpretation of the accounting literature on TDRs. Accordingly, entities not subject to supervision by one of the agencies may also find the interagency statement helpful when applying ASC 310-40 and evaluating whether a modification constitutes a TDR.
The CARES Act does not define a “financial institution” for the purpose of Section 4013 as it explicitly does for Section 4014 (Optional Temporary Relief from Current Expected Credit Losses). Entities may reference existing accounting literature and resources that define “financial institutions” (e.g., ASC Topic 942) and apply that by analogy in determining whether they can use the provisions outlined in the CARES Act. While the provisions in the CARES Act are broad, there may be circumstances where a modification may not qualify under the provisions of the CARES Act, but would qualify under the interagency guidance (e.g., a borrower more than 30 days past due at December 31, 2019, but was current at the time of the modification).
The SEC Chief Accountant has issued a statement that, for those entities that are eligible for and elect to apply either of Sections 4013 or 4014 of the CARES Act, the staff would not object to the conclusion that this is in accordance with GAAP for the periods for which such elections are available.