Financial agencies have provided additional information to encourage banks to work constructively with borrowers affected by COVID-19. The Federal Reserve announced new measures to support the economy, and the FDIC has urged a delay in CECL implementation.
The Federal Reserve, the Conference of State Bank Supervisors, the Consumer Financial Protection Bureau, the FDIC, the Office of the Comptroller of the Currency and the National Credit Union Administration issued the interagency statement that encouraged financial institutions to work with borrowers, and provided information regarding loan modifications.
The agencies said banks will not be criticised for working with borrowers in a safe and sound manner, and will not be required to automatically categorize loan modifications and troubled debt restructurings.
“The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk,” the statement said.
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, the statement 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 significant.”
The agencies’ examiners will review the loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected. “Regardless of whether modifications are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.
The Fed also announced new measures it will be supporting the economy as the impacts of the pandemic continue. The actions include:
- Support critical market functioning. The Federal Open Market Committee will purchase treasury securities and agency mortgage-backed securities in the amounts needed to support market function and effective transmission of monetary policy to broader financial conditions and the economy. The FOMC had previously announced it would purchase at least $500 billion of treasury securities and at least $200 billion of mortgage-backed securities. The FOMC will also include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
- Support credit flow to employers, consumers and businesses. The Fed will establish new programs that will collectively provide up to $300 billion in new financing. The Department of the Treasury will provide $30 billion in equity to these facilities by using the Exchange Stabilization Fund.
- Establish two facilities to support credit to large employers: The Primary Market Corporate Credit Facility for new bond and loan issuance, and the Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds.
- Establish a third facility, called the Term Asset-Backed Securities Loan Facility, to support the flow of credit to consumers and businesses. The TALF will allow the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration, and other assets.
- Facilitate credit flow to municipalities by expanding the Money Market Mutual Fund Liquidity Facility to include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit.
- Facilitate the flow of credit by expanding the Commercial Paper Funding Facility to include high-quality, tax-exempt commercial paper as eligible securities. The pricing of the facility has also been reduced.
In addition to these actions, the Fed expects to establish a Main Street Business Lending Program to support lending to small- and medium-sized businesses, complementing efforts by the SBA.
“Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy,” the Fed said in a press release.
The FDIC has also urged the Financial Accounting Standards Board to exclude COVID-19 related modifications from being considered a concession when determining a troubled debt restructuring classification. The letter from the FDIC to the FASB also urged to permit financial institutions subject to the current expected credit losses methodology in an option to postpone the implementation of CECL given the uncertain economic environment. The FDIC also requested to impose a moratorium on the date for institutions not currently required to implement CECL. This will allow banks to focus on the immediate business challenges related to the impacts of the pandemic.
“Today we are confronting new and uncertain challenges in view of the worldwide pandemic,” said FDIC Chairman Jelena McWilliams. “The nation’s banking industry is responding to rapidly evolving business conditions that are unprecedented in our history.
“To support the industry’s efforts to focus on their employees and customers, I encourage FASB to take these much needed actions to allow banks to help their communities at this time of need.”