The coronavirus rescue package included a provision that allows banks to engage in loan forbearance without having to designate the loan as a troubled-debt restructuring for accounting purposes.
This form of relief for banks has a sad history, and its current application has debatable merits. Congress should allow the relief to expire at year-end, and the federal banking agencies should not reinstitute it through regulation or guidance.
Under the coronavirus relief bill, financial institutions do not have to classify a loan modification to a help a struggling borrower as a troubled-debt restructuring (TDR) and hence treat the loan as impaired when setting the allowance for credit losses.
The relief covers forbearance actions taken before the end of 2020, or 60 days after the national emergency declaration is lifted by the president. The relief extends for the duration of the loan. The federal banking agencies are required to allow financial institutions to determine whether to make the modification and not treat the loan as a TDR.
The motivation of Congress was clear, understandable and commendable: to prevent the bank examiners and accountants from criticizing banks for taking actions the government was simultaneously encouraging the banks to take. That is, offering relief to borrowers experiencing difficulty as result of the pandemic…
Originally published in the American Banker on June 25, 2020. To access the full article, please click here.