Over the course of the past week, we have learned that many banks are being asked to consider loan modifications, payment deferrals, and other similar accommodations to borrowers impacted by the COVID-19 pandemic. Many banks are apparently considering payment waivers or deferments to both commercial and consumer borrowers impacted by the anticipated or actual economic downturn. Given the workplace limitations adopted by the Governors of several states and voluntary shut downs and workplace changes recommended by national health experts, it seems inevitable that borrower requests for accommodation will increase in the coming weeks. This would seem to be particularly true for those borrowers engaged in service businesses such as bars, restaurants, and other forms of business involving social interaction in public places.
When considering potential modifications or deferments, we recommend that our banking clients consider the following. The federal bank regulators published an Interagency Statement on Sunday, March 22, confirming that the regulators “will not direct [banks] to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings” or “TDRs” under the FASB Rules. As bankers and their accountants know, debts classified as TDRs raise capital concerns and related issues for banks, so the determination that a loan modification will not automatically trigger TDR status for a credit is significant.
Pursuant to the interagency statement, “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.” For purposes of the statement, the agencies suggested that borrowers would be deemed “current” if they were less than 30 days past due at the time of the modification. The modifications contemplated by the statement include payment deferrals, fee waivers, extension of terms, or other payment delays. Based on this guidance, it may be desirable for banks to reach out to borrowers in the impacted industries to suggest the availability of a loan modification. By doing this, the modification may be possible prior to the loan becoming delinquent, rendering any modification subject to re-designation of the credit as a TDR. It may also be appropriate to agree to modify the loan if the borrower is able to bring it into current status.
Finally, to the extent a bank opts to offer accommodations to significant commercial borrowers, we recommend considering a formal written forbearance agreement. In the forbearance agreement, the bank can obtain concessions from the borrower in exchange for the requested forbearance or modification. Concessions can include the pledging of additional collateral, cooperation in the perfection of unsecured collateral (like car title liens), confirmation of the debt calculation and the lack of defenses to enforceability, and other similar concessions that could put the bank in a better position should the default turn into a collection or foreclosure situation.
While we have taken steps to protect the safety of our attorneys and staff, Davenport Evans remains very much “open for business” and available to address questions as you navigate these unprecedented times.
This article was written by Davenport Evans lawyer Keith A. Gauer and distributed in the Davenport Evans Banking eNews. To join the eNews list, click the button below. You can unsubscribe at any time.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.