Covid 19 on existing loan arrangements1/29/2024 ![]() ![]() ![]() Modifications of loan terms do not necessarily result in so-called troubled debt restructurings (TDRs) for accounting purposes. For borrowers, clearly understanding the forbearance protection – which defaults has the lender agreed to forbear – gives certainty in the forbearance period. For lenders, if additional defaults occur then the forbearance agreement can be terminated. Specificity of the defaults is important to both the lender and borrower. Forbearance agreements typically include acknowledgement of specific defaults and setting benchmarks to be satisfied during the forbearance period which can be demonstrated through additional reporting requirements and communications with the lender. However, lenders may insist upon forbearance so that they can rely on the defaults if enforcement of loan rights and remedies is ultimately required. Borrowers may seek to have defaults waived to prevent violating covenants in other agreements or for other bonding or reporting purposes. An initial decision for the lender is whether to waive existing defaults or forbear from taking action with respect to the defaults. While not specifically mentioned in recent guidance, forbearance agreements can be an effective approach to mitigating short term risk. In addition, the guidance notes that there is no regulatory requirement for a financial institution to obtain updated valuation information for real estate related transactions when granting short-term loan modifications to borrowers affected by COVID-19. Examples of such accommodations provided by the FDIC include addressing any deferred or skipped payments by either extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. Subsequent to the joint statement, the FDIC issued the guidance available here encouraging payment accommodations with borrowers impacted by COVID-19 that facilitates the borrowers’ ability to work through the immediate impact of the virus while ultimately targeting loan repayment. Subsequent to the joint statement, the FDIC and the OCC has provided guidance on loan modifications and have highlighted areas in which the FDIC or OCC will provide more flexibility in their regulatory oversight. ![]() In the statement, which is available here, the Agencies encouraged lenders to actively work with borrowers on risk mitigation strategies including loan modifications. On Mathe Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau, and the State Banking Regulators (collectively the “Agencies”) issued an interagency statement to financial institutions to work with borrowers who are or may be unable to meet their contractual payment obligations as a result of the COVID-19 pandemic. ![]()
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