April 15, 2020
Not All Loan Modifications Granted To Businesses Impacted By COVID-19 Need To Be Classified As Troubled Assets
Written by: Michael J. Shavel
On March 22, 2020, the Consumer Financial Protection Bureau (CFPB) together with federal financial institution regulatory agencies, and state financial regulators issued a revised interagency statement encouraging financial institutions to work with borrowers affected by the current COVID-19 crisis (the “Interagency Agreement”). The Interagency Agreement clarifies the interaction between agencies and provides more insight on Section 4013 of the CARES Act, signed into law on March 27, 2020. Specifically, Section 4013 of the CARES Act suspends the requirements of lending institutions to classify certain loan modifications as troubled debt restructurings (TDRs).
The Interagency Agreement makes clear that financial institutions are encouraged to work with borrowers negatively impacted by the pandemic and states that loan modifications offered to these borrowers are viewed as positive and proactive actions that can lead to improved loan performance and reduced credit risk. When examining loan modifications, including TDRs, the agencies will not automatically adversely risk rate credits affected by COVID-19 and will not criticize prudent efforts to modify terms on existing loans for affected customers regardless of whether those modifications are considered TDRs.
Because of the ongoing state of emergency, financial institutions are not expected to designate loans with deferrals granted due to economic hardship directly related to COVID-19 as past due because of the deferral. The loan payment date is governed by the due date stipulated in the deferral documents. Finally, financial institutions are encouraged to explore options with borrowers having difficulty making loan payments including forbearance extensions, a reduction in interest rates, and/or other flexible repayment options.
Finally, it is imperative, as noted in our Client Alert of March 24, 2020 that modification agreements must otherwise conform to all legal standards including the restatement of any Confessions of Judgment.
Guidelines and regulations are changing quickly in these unprecedented times and our attorneys are tracking these changes as they occur. Contact Hill Wallack to speak with one of our experienced Creditors' Rights attorneys to learn more.
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