Compliance Alliance



BANK OF SOMEWHERE

TROUBLE DEBT RESTRUCTURING WORKSHEET WITH COVID-19 ANALYSIS

|IDENTIFYING A TROUBLE DEBT RESTRUCTURING (TDR) IN THE TIME OF COVID-19 |

|The Agencies issued an interagency statement to provide information for financial institutions who are working prudently with borrowers who are|

|or may be affected from COVID-19. They Agencies will not criticize institutions for working with borrowers and will not direct supervised |

|institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs). |

|A restructuring constitutes a “troubled debt restructuring” if the creditor for economic or legal reasons related to the debtor’s financial |

|difficulties grants a concession to the debtor that it would not otherwise consider. (Two-prong Test.) |

|The Agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith |

|basis in response to COVID-19 to borrowers who were current (less than 30 days past due on contractual payments at time of modification |

|implementation) prior to any relief are not TDRs. This includes: |

|Short term (i.e.- six months) modifications including payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment|

|that are insignificant.[1] |

|Modifications or deferral programs mandated by the Federal or State government related to COVID-19 would not be in the scope of ASC 310-40. |

|For any loan modifications made, including TDRs, the Agencies will not automatically adversely risk rate credits affected by COVID-19. For |

|borrowers of one-to-four family residential mortgages, if the loan was prudently underwritten and not past due or carried in nonaccrual status,|

|it will not result in the loans being considered restructured or modified for purposes of respective risk-based capital rules. |

|Refer to the following Worksheet for additional guidance. |

| |

| |

| |

| |

| |

| |

|Financial Difficulties[2] -- Check all that apply[3] |

|Employment impacted by COVID-19 |

|Debtor in Payment Default |

|Bankruptcy or going concern issues |

|Imminent Late Payment |

|Imminent Payment Default |

|Insufficient cash flow – Based on the debtor’s current capacity, forecasted cash flows would be insufficient to service its debts both interest|

|and principal and in accordance with existing contractual terms in the foreseeable future. |

|Inability to borrow from other creditors—Unable to borrow funds from other resources other than existing creditors at an effective interest |

|rate equal to the current market rate for similar debt to a non-TDR borrower. |

|Other (fully explain): |

|Concession – Check all applicable Concessions made. |

|A. The transfer from the |B. A modification of the loan terms.[4] |C. A short-term (i.e.- 6 |D. A modification or deferral |

|borrower to the bank, in full |Common modification of loan terms include:|months) modification to a |program mandated by Federal or State|

|or partial satisfaction of the |offer a below market interest rate, |current borrower (not 30 days |government related to COVID-19. |

|loan, of: |extension of the maturity date, |past due). If a one-to-four |Common example includes: |

|real estate, |offering terms inconsistent with new debt |family residential mortgage, |A state program that requires all |

|receivables from third parties,|of similar risk, |loan must be prudently |institutions within the state to |

|other assets, or an equity |reduction or forgiveness of principal, |underwriting, not past due or |suspend mortgage payments for a |

|interest in the borrower; |accrued interest, or fees, |in nonaccrual status. Common |specified period. |

|Other: |inadequate collateral or guarantees |modification of loan terms |Other: |

| |(adding collateral or guarantor protection|includes: | |

| |that does not adequately compensate other |Payment Deferral, | |

| |terms of the restructuring), |Fee waivers, | |

| |changing the loan from amortizing to |Extensions of repayment terms | |

| |nonamortizing (interest-only when the |Other delays in payment that | |

| |lender does not expect to collect all |are insignificant. | |

| |amounts due or the delay in payment is not|Other: | |

| |insignificant), | | |

| |creating a multiple note structure also | | |

| |referred to as an A/B note structure in | | |

| |which a troubled loan is split into two | | |

| |parts one portion that is expected to be | | |

| |fully collected and one portion that is | | |

| |charged off; and substitution of a related| | |

| |party borrower and/or guarantor; or | | |

| |Other: | | |

|If you answered “YES” to a combination of A, B and/or C, Continue. |

|If you only answered C, then STOP. The loan is a COVID Non-TDR. |

|If you only answered D, then STOP. The loan is a COVID Non-TDR. |

|If you checked None, then STOP. The loan is not a TDR. |

|Loan is a TDR |

|Loan is NOT a TDR |

|Loan is a COVID Non-TDR* |

|*Additional Guidance for COVID-19 Non-TDR Loans |

|Past Due Reporting |

|For loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to |

|COVID-19 as past due because of deferral if the financial institution agrees to a payment deferral. |

|Nonaccrual Status and Charge-offs |

|Each financial institution should refer to the applicable regulatory reporting instructions, and internal accounting policies, to determine if |

|loans to stressed borrowers should be reported as nonaccrual assets in regulatory reports. If a short-term arrangement, these loans generally |

|will not be reported as nonaccrual. Refer to charge-off guidance in the instructions for the Consolidated Reports of Condition and Income. |

|Discount Window Eligibility |

|Loans that have been restructured per Agency COVID-guidelines will continue to be eligible as collateral at FRB’s discount window based on the |

|usual criteria. |

|TRACKING |

|Systems in place to track and monitor TDRs |Have manual processes in place to track and monitor TDRs |

|Systems in place to track and monitor COVID Non-TDR modifications. |Have manual processes in place to track and monitor COVID Non-TDR |

| |modifications. |

|There is communication between lending and finance | |

|MODIFICATIONS |

|There is a rebuttable presumption that loan modifications are TDRs. However, in a COVID-19 analysis, ensure current status of borrower(s), |

|and that all modifications are short-term and do not cross over into becoming a TDR requiring further analysis. If for a one-to-four |

|mortgage, ensure loan was prudently underwritten, is not past due and does not carry accrual status to be exempt from being considered |

|restructured or modified for purposes of risk-based capital rules. |

|Supporting documentation of the TDR and COVID Non-TDR processes, including the decision making |

|Visibility in the loan files |

|Internal controls |

|Updated underwriting documentation that is prepared to assess whether the modified loan terms are “at market” and other borrowers (with |

|comparable credit risk) would have qualified for these terms |

|Updated underwriting documentation that is prepared to assess COVID scenarios justifying a modification within Agencies’ guidelines to remain|

|outside scope of TDR. |

|APPLICABLE ACCOUNTING STANDARDS: |

|TDR = Impaired. All TDRs are impaired. |

|Applied ASC 310-40, Troubled Debt Restructurings by Creditors |Applied ASC 310-10-35, Receivables, Overall, Subsequent Measurement |

|TDRs are impaired loans and the impairment is individually measured |TDRs are impaired loans and the aggregate impairment measurement was |

|according to ASC 310. |used[5]. |

|COLLATERAL DEPENDENT: |

|Evaluating whether an impaired loan is collateral dependent is important because, for regulatory reporting purposes, an institution must |

|measure impairment on impaired collateral-dependent loans based on the fair value of the collateral rather than the present value of expected|

|future cash flows. |

|Repayment is expected to be provided solely by the underlying |Impairment is measured on impaired collateral-dependent loans based on|

|collateral, which includes repayment from the proceeds from the sale |the fair value of the collateral. |

|of the collateral, cash flow from the continued operation of the | |

|collateral, or both. | |

|NOT COLLATERAL DEPENDENT: |

|Evaluating whether an impaired loan is not collateral dependent is important because, for regulatory reporting purposes, an institution must |

|measure impairment on impaired loans that are not collateral-dependent based on the present value of expected future cash flows rather than |

|based on fair value of the collateral. |

|Repayment depends on cash flow generated by the operation of a |Impairment is measured on impaired non-collateral-dependent loans |

|business or from sources outside the scope of the lender’s security |based on the present value of expected future cash flows. |

|interest in the collateral, such as cash flows from borrower resources| |

|other than the collateral. | |

|IMPAIRED LOAN THAT IS COLLATERAL DEPENDENT (OPERATION OF COLLATERAL) |

|Measuring Impairment and Classification and Charge-Off Treatment: |

|Impairment is based on the fair value of the collateral regardless of |Repayment is dependent only on the operation of the collateral (not |

|whether foreclosure is probable. |dependent on the sale of the collateral), fair value is not adjusted |

| |by the estimated costs to sell. |

|The impairment measurement is the difference between the collateral’s |The impairment amount stays in the ALLL. |

|fair value and the loan balance[6]. | |

|There is a confirmed loss to charge off. |There is a combination of both. |

|The impairment amount is reviewed quarterly and adjusted, if |If not charged-off already, the loan is evaluated quarterly to |

|necessary, based on ongoing performance and conditions. |determine whether a charge-off should be taken. |

|When available information confirms that the loan or a portion |Any portion of the recorded investment in the loan not charged off is |

|thereof, is uncollectible, this amount is promptly charged off against|adversely credit risk rated or classified no worse than substandard. |

|the ALLL. | |

|The amount of the loan exceeding the fair value of the collateral, or | |

|portions thereof, are adversely graded or classified doubtful[7]. | |

|Comments: |

|IMPAIRED LOAN THAT IS COLLATERAL DEPENDENT (SALE OF COLLATERAL) |

|Measuring Impairment and Classification and Charge-Off Treatment: |

|Impairment is based on the fair value of the collateral regardless of |Fair value is adjusted by the estimated costs to sell. |

|whether foreclosure is probable. | |

|The impairment measurement is the difference between the collateral’s |The impairment amount stays in the ALLL |

|fair value minus the estimated costs to sell and the loan balance[8] | |

|There is a confirmed loss to charge off. |There is a combination of both. |

|The impairment amount is reviewed quarterly and adjusted, if necessary, |If not charged-off already, the loan is evaluated quarterly to |

|based on ongoing performance and conditions. |determine whether a charge-off should be taken. |

|When available information confirms that the loan or a portion thereof, |Any portion of the recorded investment in the loan not charged off is |

|is uncollectible, this amount is promptly charged off against the ALLL. |adversely credit risk rated or classified no worse than substandard. |

|The amount of the loan exceeding the fair value of the collateral, or | |

|portions thereof, are adversely graded or classified doubtful. | |

|Comments: |

|IMPAIRED LOAN THAT IS NOT COLLATERAL DEPENDENT |

|Measuring Impairment and Classification and Charge-Off Treatment: |

|Impairment is based on the present value of expected future cash flows |Except that as a practical expedient, a creditor may measure |

|discounted at the original loan’s effective interest rate. |impairment based on the observable market price of the loan. |

|Present value calculation should be completed using the effective |Effective interest rate of return includes adjustments resulting from |

|interest rate of return (original terms). |deferred fees and costs as well as other adjustments, such as purchase|

| |premiums and discounts. |

|Use the original contractual interest rate on the loan, not rate |Analysis should use the best estimate of expected cash flows. This |

|specified in the restructured loan agreement. |includes prepayment or default assumptions after being modified. |

|The resulting present value is subtracted from the loan balance to |The impairment amount stays in the ALLL |

|derive the impairment amount. | |

|There is a confirmed loss to charge off. |There is a combination of both. |

| |Comments: |

|Loan classification at the time of the restructuring is Substandard. (If| |

|not checked, explain in comments.) | |

| |

|IMPAIRED LOAN THAT IS NOT COLLATERAL DEPENDENT (REAL ESTATE LOAN) |

|Measuring Impairment and Classification and Charge-Off Treatment: |

|Impairment is based on the present value of expected future cash flows|Except that as a practical expedient, a creditor may measure |

|discounted at the original loan’s effective interest rate. |impairment based on the observable market price of the loan. |

|Present value calculation should be completed using the effective |Effective interest rate of return includes adjustments resulting from |

|interest rate of return (original terms). |deferred fees and costs as well as other adjustments, such as purchase|

| |premiums and discounts. |

|Use the original contractual interest rate on the loan, not rate |Was the original effective interest rate determined on an adjustable |

|specified in the restructured loan agreement. |rate mortgage? (Explain in comments.) |

| |If loan has an initial or starter rate that is less than fully indexed|

| |rate, it is inappropriate to use this starter rate as the original |

| |effective interest rate. One common approach is to consider the |

| |original effective interest rate to be a blend of the starter rate and|

| |the fully indexed rate at the time of the modification. |

| |Another alternative that may be a practical expedient is to treat the |

| |fully indexed rate at the time of the modification as the original |

| |effective interest rate. |

|Analysis should use the best estimate of expected cash flows. This |The resulting present value is subtracted from the loan balance to |

|includes prepayment or default assumptions after being modified. |derive the impairment amount. |

|The impairment amount stays in the ALLL |There is a confirmed loss to charge off. |

|There is a combination of both. | |

|Loan classification at the time of the restructuring is Substandard. | |

|(If not checked, explain in comments.) | |

|Comments: |

|NONACCRUAL |ACCRUAL |

|Typically, TDR loans should be on nonaccrual. All TDR loans are impaired. Impaired and nonaccrual loans have the characteristic that payment |

|in full is not expected according to original terms. TDR loans would have been identified as impaired before restructuring and should already|

|have been on nonaccrual. However, a TDR loan can return to accrual status provided all the following conditions are met: |

|Management has completed a current, well documented credit |Management is reasonably assured repayment of P&I. [10] |

|evaluation.[9] | |

|The loan must show sustained payment performance (Generally at least 6| |

|months).[11] | |

|Comments: | |

|Conclusions |

|Objective: Discuss corrective action and communicate findings. |

|Procedure |Comments |

| | |

| | |

| | |

| | |

| | |

-----------------------

[1] ASC 310-40 requires financial institutions to consider the following factors in making this determination: whether the amount of delayed restructured payments is insignificant relative to the unpaid principal or collateral value of the debt, resulting in insignificant shortfall in contractual amount due from borrower; and whether delay in timing of restructured payment period is insignificant relative to frequency of payments due under the debt, the debt’s original contractual maturity or the debt’s original expected duration.

[2] A bank should not limit its analysis to a loan to which it is considering concession; the bank should assess the borrower’s entire situation and use global cash flow in its analysis of the debtor’s financial difficulties.

[3] Not all inclusive but provides some of the more common indicators of the depth of financial distress that is considered financial difficulty.

[4] Important to note, not all modifications are concessions. The modification is not a restructuring if the lender plans to collect all amounts due including interest accrued at the original contract rate and results only in payment delay that is insignificant. Modification must be more than insignificant. Consider cumulative modifications. New rate should not be compared to the old rate; it should be compared to the current market rate for loans with similar risk characteristics.

[5] ASC 310 does permit the aggregate measurement for TDR loans with similar risk characteristics. A creditor may aggregate those loans and may use historical statistics, such as average recovery period and average amount recovered, along with a composite effective interest rate as a means of measuring impairment of those loans.

[6] Costs to sell are not deducted from the fair value because repayment or satisfaction of the loan is not dependent on the sale of the collateral.

[7] When the potential for full loss may be mitigated by the outcomes of certain pending events, or when loss is expected but the amount of loss cannot be reasonably determined.

[8] Costs to sell are deducted from the fair value because repayment or satisfaction of the loan is dependent on the sale of the collateral

[9] There should be complete current financial information, which should include a global cash flow analysis demonstrating the borrower’s ability to repay. Credit evaluation should also include a current estimated value of any collateral securing the loan.

[10] There must be economic substance. The bank is not just extending the terms to avoid foreclosure or charge off. Reasonable amortization must be in place and there cannot be doubt of collectability. Likewise, management must evaluate the likelihood of collecting any balloon payments.

[11] Since interest-only payment raise questions about the collectability of principal interest only payments may not satisfy this requirement. Also, if the borrower is only required to make quarterly or semiannual payments a 6-month period may not be sufficient to demonstrate sustainable payment performance.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download