Pub. 10 2020-2021 Issue 2

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S www.coloradobankers.org 8 BY SCOTT POLAKOFF, CAMS, EXECUTIVE VICE PRESIDENT WITH FINPRO Remember that banks must maintain records on the number and dollar amount of loan modifications approved under Section 4013 of the Interagency Guidance and report this data to the board of directors on a regular basis. The TDR determination is only the first step in the COVID-19 Loan Modification process. Unfortunately, toomany banks neglect to implement the second step in the COVID-19 LoanModification process, which is vital to accurately identify, measure, monitor and control the bank’s risk profile. Was the borrower impacted by COVID-19? q YES q NO Was the modification pursuant to Section 4013? q YES q NO If yes, was the loan current as of Dec. 31, 2019? q YES q NO If yes, was the loan modification before Dec. 31, 2020? q YES q NO Was the modification pursuant to the Interagency Guidance? q YES q NO If yes, was the loan current at the time of modification? q YES q NO If yes, was the loan modification short ter m (i.e., six months)? q YES q NO M any banks across the country are at risk of CAMELS downgrades, increased deposit insurance assessment premiums and regulator y enforcement actions due to inadequate risk management practices for their COVID-19 Loan Modification Program. Loan modifications have been part of most banks’ lending operations for many years. Before the coronavirus, such modifications were often prompted by a borrower’s “financial distress.” Banks would attempt to work with the financially distressed borrower by granting a “concession” that the bank otherwise would not consider other borrowers with a similar risk profile. An example of such a loan modification might be an interest rate reduction from 5% to 3% for 12 months to help a financially distressed borrower. Generally speaking, this type of loan modification would be categorized as a Troubled Debt Restructure (“TDR”) under accounting literature (ASC 310-40) and captured as such in Call Reports. TDRs are considered impaired loans. Many banks have COVID-19 Loan Modifica - tions approximating 25% of their commer - cial portfolio. When the country became engulfed with the coronavirus, both Congress (Section 4013 of the CARES Act) and the Regulators (April 2020 Interagency Guidance) issued material to guide banks on TDR designation for COVID-19 related loan modifications. Bankers must understand that while Section 4013 and the April 2020 Interagency Guidance both discuss the applicability of TDRs, they have materially different requirements (modification duration, date of record for current/ delinquency status, etc.) for determining when the TDR designation is necessary. FinPro urges all banks to specifically designate whether the COVID-19 Loan Modification was approved under Section 4013 of the CARES ACT or under the April 2020 Interagency Guidance. This document should be in each loan modification file and address the items shown in the graphic. COVID-19 Loan Modifications: It Is More Than Just a TDR Issue