Banks get the break they need on lending operations

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Banks and credit unions are eager to take advantage of new flexibility to restructure loans affected by the coronavirus outbreak.

Federal regulators and the Financial Accounting Standards Board gave a helping hand to lenders on Sunday, agreeing that pandemic-related short-term loan modifications should not immediately be viewed as distressed debt restructurings. Normally, any concession made to a borrower would trigger the classification in TDR.

This is a big boost for lenders as TORs need to be assessed for impairment and a potential increase in the allowance for loan losses. And a TDR label remains stuck to the loan as long as it is on the bank’s books.

“The technical details of the impairment analysis are very inconvenient,” said Mary Ann Scully, president and CEO of $ 2.4 billion asset Howard Bancorp in Baltimore. “Collateral values ​​can be affected, and cash flow is most definitely affected. “

In the aftermath of the financial crisis, restructured loans at banks topped $ 140 billion at the end of 2011. Clearly, regulators are hoping to avoid a similar increase due to the coronavirus outbreak.

The issue had also caught the attention of some lawmakers.

Representative Blaine Luetkemeyer, R-Mo., In an interview on Friday, identified RDTs as “a stumbling block” that “would prevent banks from doing what they need to do.” Luetkemeyer said at the time that he was exploring ways to reverse or suspend the accounting for such restructurings.

A delay in registering TOR is expected to mitigate any spike in problem loans ahead of first quarter earnings and by extension “reduce the threat of a decline in tangible book value per share”, especially for publicly traded banks , said Chris Marinac, analyst. at Janney Mntgomery Scott.

Marinac had called on regulators to issue emergency guidelines on how lenders should deal with loans compromised by the coronavirus unrest.

“This is an unprecedented credit event for all banks, so it requires an emergency manual,” Marinac wrote in a research note Thursday.

Many banks, including Howard, $ 4.4 billion in Camden National in Maine and $ 6.7 billion in Tompkins Financial in Ithaca, NY, have started approving temporary deferrals and other loan modifications for hard-pressed customers well ahead of Sunday’s statement.

“We have focused on short-term relief, deferring payments for 90 days,” said Renee Smyth, director of experience and marketing at Camden National.

“We want to help alleviate some of the pressure on borrowers, but we don’t want to have to classify loans as RDTs,” Smyth added. Regulatory intervention “helps us as a bank”.

The flexibility of reporting on troubled debt restructurings should put banks in a better position to help recovery efforts after the coronavirus outbreak, says Mary Ann Scully, CEO of Howard Bancorp.

While some loans will require restructuring, having to deal with a wave of new RDTs “would become a bigger reporting problem,” said Smyth.

Scully noted that the relief will take some pressure off his staff. Without intervention, bankers would scramble to calculate cash flow and discounts to determine depreciation.

“What cash flow are you going to discount to determine if there is an impairment?” Said Scully. “What if they said you need to look at the cash flow when you made that decision?” … The people who are zero in this situation are the last people in the world you would want to prematurely discount. – flow analysis enabled.

A number of banks could also suffer from “institutional knowledge gaps” for training, as it has been a dozen years since the last economic downturn, Aite Group noted in a recent report.

While the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve and the National Credit Union Administration issued a joint statement on March 9 encouraging lenders “to work constructively with borrowers,” said Scully that the guidelines were too general to be given to lenders. enough confidence that current stocks will not come back to bite them in the future.

“That kind of advice was way too high, as well-intentioned as it could have been,” said Scully. “We have desperately pleaded with people for more specific, tangible and actionable advice. … This whole idea of ​​how forbearance actions are going to be handled has been at the top of every priority list.

The event that seems to have galvanized the new position was a letter FDIC President Jelena McWilliams wrote to the FASB on Thursday urging a suspension of the current standard on expected credit losses and adjustments to TDR’s accounting rules.

Three days later, regulatory agencies said they “will not criticize institutions for working with borrowers or order supervised institutions to automatically categorize all loan changes related to COVID-19 as restructurings of debts in difficulty “.

The FASB issued a separate statement on Sunday in line with the approach.

“These guidelines were developed in consultation with FASB staff who endorse this approach and stand ready to assist stakeholders with any questions they may have during this time,” said the FASB.

The statements are “useful” because they “help avoid what would otherwise be a regulatory problem,” said Stephen Romaine, president and CEO of Tompkins.

“This avoids an additional injury from a regulator saying your RDTs have increased because you have done all you can to help your clients by delaying payments,” Romaine added. “They have been very clear. We greatly appreciate that regulators have recognized the importance of this and why banks need to do this for their customers.

For Scully, Sunday’s announcement puts Howard and other banks in a better position to help their communities when recovery efforts begin.

The uncertainty surrounding RDTs “was creating a lot of angst as to what it would do to your future ability to help the economy rebound when it is time for it to happen,” said Scully.

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