Federal Regulators Issue TDR Guidance
NAFCU continues to receive questions from credit unions as they navigate the challenges posed by COVID-19 and work to help their members who are adversely impacted. One common question is to what extent loan modifications made during this time will be considered a “troubled debt restructuring” (TDR) under NCUA guidance and generally accepted accounting principles (GAAP).
As a reminder, Appendix B to Part 741 of NCUA’s regulations sets forth the agency’s expectations regarding loan workouts, nonaccrual policies, and regulatory reporting of TDR loans. In this guidance, the definition of TDR is set by the Financial Accounting Standards Board (FASB), whether a specific loan modification is a TDR is generally a question requiring accounting expertise, not legal expertise. Credit unions may need to consult with their accountant on these kinds of issues.
In Appendix B, NCUA stated that a TDR is “a restructuring in which a credit union, for economic or legal reasons related to a member borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.” This can include “a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate.” In other words, many of the programs credit unions have been considering to assist members affected by COVID-19 seemed to potentially meet the definition of TDR.
Given the number of financial institutions considering hardship modifications and similar ways to help borrowers, on March 22, 2020 NCUA joined other financial regulators in issuing guidance on this topic. According to regulators, modifications “do not automatically result in TDRs” and in their conversations with FASB, it would seem that short-term modifications made in good faith to respond to COVID-19 are not TDRs when made to borrowers who were current prior to any relief. This includes short term (e.g. six month) modifications like:
- Payment deferrals;
- Fee waivers; or
- Extensions of repayment terms.
This could also include other delays in payment that are “insignificant,” which the regulators explained in a footnote is determined under Accounting Standards Codification ASC 310-40. Factors to be considered include “whether the amount of delayed restructured payments is insignificant relative to the unpaid principal or collateral value of the debt…resulting in an insignificant shortfall in the contractual amount due…” Another factor is whether the delay in a restructured payment period is insignificant compared to the frequency of payments due under the debt, original maturity date, or original expected duration.
The guidance goes on to explain that granting a deferral does not necessarily mean the loan must be reported as past due. Also, existing guidance should be referenced to determine if particular loans should be reported as being in nonaccrual status and if a loan seems as though it will not be repaid, refer to charge-off guidance. For credit unions, charge-off guidance can be found in Letter to Credit Unions 03-CU-01.
It is also worth noting that in this guidance, regulators reiterated their encouragement that credit unions “work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.” Overall, the guidance states that credit unions will not be “criticized” if credit risk is mitigated through actions that are consistent with safety and soundness.