MBA, Trade Groups Ask Banking Agencies for TDR Relief

The Mortgage Bankers Association and more than a half-dozen industry trade groups asked federal banking agencies for guidance that loan modifications with terms longer than six months fall within the troubled debt restructuring relief provided by a recent Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.

The guidance would preserve financial institutions’ ability to continue work with borrowers and grant additional incremental accommodations that would total more than six months after December 31, without creating TDRs.

The letter also urges the agencies to reinforce that financial institutions may use their “reasonable judgment” when assessing credit risk during the unique circumstances of the pandemic.

“To date, these actions have been particularly effective in allowing lenders to offer prudent relief to commercial real estate borrowers who have been acutely affected by the pandemic and whose properties are reasonably expected to return to viability post the pandemic, the letter said.

“Unfortunately for financial institutions and borrowers, many of the modifications granted under the Interagency Statement and section 4013 of the CARES Act are reaching the end of their six-month terms at that same time that the CARES Act protections are set to expire on December 31. “This confluence of events creates challenges for any financial institution that determines that it is most prudent to continue employing a deliberate, incremental approach when its manages requests for further extensions of those existing modifications, where the combined terms of all modifications will be greater than six months,” the letter noted.

The letter recommends if an institution elects to continue to employ an incremental approach, any incremental loan modification that occurs after year-end 2020 will result in an automatic TDR. Alternatively, the financial institution can avoid TDR treatment by making a loan modification before the end of 2020 with a term as long as could possibly be necessary, forgoing its incremental approach.

To foster and support financial institutions’ continued use of an incremental approach to managing loan modifications during the pandemic, the trade groups urged the agencies to provide guidance that a loan modification with a term greater than six months (e.g., up to 18 months combined) will not automatically result in a TDR under the Interagency Statements.

Additionally, the letter points out TDR relief does not also relieve a financial institution from responsibility for managing the credit risk of the loan. For example, even if a loan modification does not result in a TDR under the CARES Act or under the Interagency Statements, financial institutions will need to critically assess and monitor the credit risk of the loan as modified and under current circumstances.

“As a result, it will be critical going forward for the Agencies to continue to recognize the need for financial institutions to have flexibility to use their reasonable, market-based judgment when assessing credit risk under the current idiosyncratic circumstances of the pandemic,” the letter said. “Business-as-usual approaches may not be effective or appropriate. For example, in some cases, commercial properties will have a viable pathway to stabilization, but recognizing that fact in a risk assessment may require an adjustment to pre-pandemic approaches. We encourage the Agencies to reaffirm that financial institutions have flexibility to use reasonable and prudent judgment to give borrowers and lenders more time to see properties and loans through this pandemic.”

Joining MBA in the letter: the American Hotel & Lodging Association; the American Resort Development Association; the Asian American Hotel Owners Association; the CRE Finance Council; the International Council of Shopping Centers; the Latino Hotel Association; Nareit; and The Real Estate Roundtable.