The coronavirus pandemic has changed many things, including how financial institutions view loan modification. With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), institutions won’t be directed to classify loan modifications as trouble debt restructurings (TDRs). Financial institutions have been encouraged to work with borrowers impacted by COVID-19, as confirmed in a March 22 statement by these agencies: The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, and Conference of State Bank Supervisors.
As a result, “Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs,” regulators said. “This includes short-term — for example, six months — modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.”1
Institutions Are Working with Borrowers
The agencies are actively encouraging institutions to work with those unable to meet contractual payment obligations as a result of the pandemic. They are viewing modification programs as means to mitigate adverse effects on borrowers. Financial institutions can also mitigate credit risk using safe and sound practices, which they can use to assist borrowers, and will not be criticized for helping them improve an existing non-pass loan to mitigate risk.
Suspension of TDR
A TDR refers to debt restructuring when a creditor grants a debtor a concession it would not otherwise consider. Economic or legal reasons may be involved. The CARES Act enables financial institutions to elect to suspend TDR accounting principles if a loan modification is made related to COVID-19. This applies from March 1, 2020 until the end of the year, unless the emergency declaration is terminated.
Under the most current rules, modifications that apply include a forbearance agreement, repayment plan, mortgage interest rate modification, or other arrangement that involves a deferral or delay in payment of a loan principal/interest. To be eligible, loans must be current as of December 31, 2019. Borrowers must be less than 30 days past due on payments.
Paycheck Protection Program
With the Paycheck Protection Program, issued under the CARES Act, an eligible borrower can receive a loan covering payroll, rent, utilities, or mortgage interest between February 15, 2020 and June 30, 2020. If one spends the proceeds appropriately, up to 100% of the loan can be forgiven. Loan proceeds cannot be used to reduce the principal on an existing loan, while an owner or related business in bankruptcy is not eligible.
If a payment deferral is granted due to the crisis, the loan will not be considered past due. The contractual agreement governs the due date. But if an institution agrees to a deferral, no payments may be past due and nor will the loan be considered so during the specified deferral period. Loans to borrowers with financial difficulties won’t be reported as nonaccrual, while charge-off guidance in the Consolidated Reports of Condition and Income instructions applies.
Consult with a Loan Modification Lawyer at OakTree Law
It is now easier to get help if you’re behind on loan payments. Modification can help avoid defaulting on a secured loan, which can result in losing your car or home. The CARES Act has eliminated many of the roadblocks, but it’s still important to tread carefully. Have proof of income and important documents and make sure to communicate openly with your lender. Keep them informed of your situation each step of the way.
If you are experiencing financial difficulties, a loan modification lawyer can help. An attorney can provide advice and get your lender to agree to a principal reduction, lower interest rate, extended term, or other option. We understand that paying back your loan during the COVID-19 crisis may be challenging. Contact OakTree Law at 562-219-2979 and we’ll be glad to assist you.