CUNA Compliance Blog Post Dives Deep into Loan Modifications

Nancy Degrandi, CUCE, BSACS, breaks down eligible TDRs amid the pandemic.

5/26/2020

In a recent CUNA Compliance Blog post, Credit Union Compliance Expert and Bank Secrecy Act Compliance Specialist, Nancy DeGrandi, reviewed loan modifications during the current COVID-19 emergency:

As you may know, the federal financial institution agencies, in consult with state financial institution regulators, have issued statements on loan modifications to those borrowers affected by COVID-19. In addition, the agencies have stated that examiners will not criticize conservative and prudent efforts by credit unions, regardless of whether any modifications are considered TDRs or are adversely classified. 

As you know the CARES Act permits financial institutions to temporarily suspend certain requirements regarding TDRs during the COVID-19 pandemic. Last month’s (April 2020) revised statement on loan modifications provides the framework for assisting financial institutions in determining which loan modifications are not considered TDRs as a result of the COVID-19 pandemic. 

Loan modifications under Section 4013 of the CARES Act (a section 4013 loan)

For an eligible loan not to be categorized as a TDR it must meet the following requirements:

  • The loan modification is as a result of difficulties related to COVID-19
  • The loan modification occurs between March 1 and December 31 (or 60 days after December 31, 2020 or the end of the COVID-19 national emergency)
  • Executed between March 1 and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31 (applicable period).

If the modification meets the three requirements above it is a section 4013 loan and does not qualify as a TDR as per the April 7 interagency statement (TDR analysis using ASC Subtopic 310-40 is not required).

In addition, section 4013 loans are not reported as TDRs in regulatory reports — BUT you need to maintain records of the volume of section 4013 loans granted for supervisory purposes.

Loan modifications NOT under Section 4013 of the CARES Act

For loan modifications not eligible as a section 4013 loan, the interagency statement provides the following, “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 TDR’s under ASC Subtopic 310-40.” Hmm … so what type of modifications are included? The statement provided the following examples: short-term (6 months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. As for what is meant by “current,” borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

Therefore, based on the information above, for a loan modification granted during the COVID 19 pandemic, NOT to be considered a TDR, the borrower is considered current if they are less 30 days past due on their contractual payments at the time a modification program is implemented. In addition, a borrower is current on the existing loan either individually (or as part of a program for creditworthy borrowers) who are experiencing short term financial or operational problem as a result of COVID-19.

So, for a loan modification to NOT be considered a TDR based on the interagency statement, it meets the following requirements:

  • The modification is in response to the National Emergency (COVID-19)
  • Payments at the time the modification program is implemented, are current
  • The modification is short term (six months or less).

If the debt doesn’t meet these requirements or is related to a principal or interest deferral then you need to conduct an analysis using ASC Subtopic 310-40.

Past Due Reporting

Do Not report loans deferrals granted as a result of the COVID-19 pandemic as past due. Why? The interagency statement provided that because a loan’s payment date is governed by the due date stipulated in the legal agreement. If there is an agreed upon payment deferral by the financial institution, then there may be no contractual payments being past due. Therefore, they are not considered past due during the period of deferral.

Should these loans be reported as non-accrual assets?

It is likely that the loans deferred as per the issued statement guidance should not be reported as non-accrual assets in regulatory reports. However, Call Report instructions, as well as your credit union’s internal accounting policies, should be consulted to assist in determining non-accrual status for regulatory reporting purposes.

Charge-Offs

As for charge-offs, time will tell. Time will provide more indication to you as to if a specific loan will not be repaid. Credit unions should consult NCUA Letter to Credit Unions 03-CU-01 for more information.

Question of the Week

Q. Can we require that loan payments be made via recurring transfers from the member’s account to the loan or require direct deposit?

A. No. Regulation E specifically prohibits lenders conditioning a loan approval based on required electronic funds transfer. You can motivate the member to set up automatic payments with different programs, like lowering the APR for example, but you cannot require the automatic electronic payments as a condition of the loan.

Resources

12 CFR 1005.10(e)
Regulation E – Official Staff Interpretations

Legal Briefs

National Credit Union Administration (NCUA)

Federal Agencies Share Principles for Offering Responsible Small-Dollar Loans
The NCUA, along with the other federal financial institution regulators, issued a joint agency statement on principles for offering small-dollar loans in a responsible manner to meet financial institution customers’ short-term credit needs.

Temporary Regulatory Relief in Response to COVID-19 – Prompt Corrective Action
The NCUA issued two temporary changes to its prompt corrective action (PCA) regulations. The first temporarily enables the NCUA Board to issue an order applicable to all Federally Insured Credit Unions to waive the earnings retention requirement for any FICY that is classified as adequately capitalized. The second modifies the specific documentation required for new worth restoration plans. These temporary modifications will be in place until December 31.

Joint-Account Insurance Coverage Proposed rule
The proposed rule would provide an alternative method to satisfy the membership card or account signature-card requirement.

Consumer Financial Protection Bureau (CFPB)

CFPB Released Video on Consumers Receiving Stimulus Payments on Prepaid Debit Card
The CFPB released a video to inform consumers that they may receive economic impact payments on a prepaid debit card starting this week.

CFPB to Provide Additional Extension of Comment Period for Supplemental Notice of Proposed Rulemaking on Time Barred Debt
The CFPB announced it has extended the deadline for comments on the NPRN on time-barred debt disclosures until August 4.

CFPB Issues Consumer Complaint Bulletin
The CFPB issued a report which analyzed the complaints that the CFPB received during the COVID-19 pandemic. The bulletin shows that mortgage and credit card complaints top the list of complaints that the CFPB has received that mention coronavirus or related terms.

CFPB Takes Action to Help Struggling Homeowners Seeking Mitigation Efforts; Consumers Seeking Small-Dollar Loans
The CFPB announced that it issued to No-Action Letter (NAL) templates under its innovation policies.

Financial Crimes Enforcement Network (FinCEN)

FinCEN Advisory on Medical Scams Related to COVID-19 and Filing Instructions for Financial Institutions
FinCEN issued a notice which contains pertinent information regarding reporting COVID-19 related criminal and suspicious activity and reminds financial institutions of certain BSA obligations.

Federal Housing Finance Agency (FHFA)

Lender Letter (LL-2020-03)
The FHFA issued temporary guidance regarding the eligibility of borrowers who are in forbearance, or have recently ended their forbearance, and are looking to refinance or buy a new home. Borrowers are eligible to refinance or buy a new home if they are current on their mortgage.

Washington State Department of Financial Institutions (DFI)

Letter to Banks and Credit Unions Regarding Additional Support for Customers Experiencing Difficulty due to Delayed Unemployment Benefits
The Washington State DFI released a letter to banks and credit unions which encourages the financial institutions to work with members who may have been adversely impacted by unemployment claim processing delays which were caused by the organized unemployment fraud schemes.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of May 22. The last update prior to this was May 13.