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CARES Act encourages flexible terms with mortgage holders

Apr 7, 2020

Last month, Waller published an article (Bank Interagency group offers guidance on working with borrowers affected by COVID-19) analyzing guidance issued by the federal financial regulatory agencies encouraging lenders to “work constructively with borrowers” and offer loan modification programs in a safe and sound manner to mitigate the adverse effects of COVID-19. 

With the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), on March 27, the agencies issued revised guidance to provide additional information to financial institutions and to clarify the interaction between the agencies’ guidance and the CARES Act.

Section 4013 of the CARES Act creates a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations, and provides financial institutions the option to suspend temporarily certain requirements under U.S. GAAP related to troubled debt restructurings (“TDRs”).  A financial institution may account for an eligible loan under Section 4013 if the loan modification is:

  • related to COVID-19;
  • 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 (A) 60 days after the date of termination of the COVID-19 national emergency or (B) December 31, 2020.

If the above criteria is met, the financial institution is granted certain relief with respect to such loans.  Specifically, the financial institution is not required to include such loans as TDRs on regulatory reports and are not required to determine impairment associated with certain loan concessions otherwise required for TDRs.  The agencies, however, expect financial institutions to maintain records and data regarding the loans and loan modifications made pursuant to Section 4013 for future supervisory purposes.

If a financial institution enters into a loan modification that does not meet the eligibility criteria set forth in Section 4013, the agencies reiterated that such loan modifications do not automatically result in TDRs.  Specifically, the agencies reaffirm that short-term loan modifications made prudently and in good faith to mitigate the impact of COVID-19 on borrowers who were current prior to any relief are not considered TDRs.  Furthermore, financial institutions may presume that borrowers 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, if:

  • The modification is in response to the COVID-19 national emergency;
  • The borrower was current on payments at the time the modification program is implemented; and
  • The modification is short-term.

As discussed in Waller’s prior article, the agencies view loan modification programs as positive, prudent actions and will not criticize institutions for working with borrowers experiencing short-term financial or operational distress due to COVID-19.  The agencies continue to expect examiners to understand context and exercise judgment when reviewing loan modifications and note that examiners will not automatically penalize credits that are affected by COVID-19.  Regardless of whether modifications result in loans that are considered TDRs, loans eligible under Section 4013 of the CARES Act, or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers. 

For additional information, please contact Rob Harris, Kevin Tran, Richard Hills or your regular Waller contact at (615) 244-6380.

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