As the COVID-19 health crisis continues to batter the economy, a troubled debt restructuring (TDR) will consume a significant portion of getting businesses up and running as unprecedented financial difficulties have grappled every industry in the world. A TDR takes place only when unusual circumstances present themselves, such as a worldwide pandemic forcing global closures of businesses deemed "non-essential." So then, a creditor may offer a debtor a concession also under one of the conditions below:
- The debtor files for bankruptcy.
- The debt is in default.
- The debtor's securities have been delisted.
- Other sources of funds are no longer an option.
- The debt cannot be met under current circumstances.
There are several options for concessions, and restructuring, such as a maturity date extension, acceptance of varying types of payments besides cash, a decrease in the principal or even the interest rate. If the debtor can get funds from other sources, at market rates, then a TDR may not be the right solution. Invariably, the large-scale economic impact will have many financial organizations searching for new ways to manage their debtors and their loans. When the recovery process begins, and it will, the financial institutions who can design more manageable terms and attractive loan offers will set themselves apart from their competition and gain more customers over the long-term. Since there are significant financial problems to deal with in the current, and near future, it's crucial to ensure your systems and processes are optimized to handle the deluge. This isn't a time to mask problems, but instead, it is the time to discover the bottlenecks and determine how to address them now. With a TDR, financial institutions can sometimes disagree how and where to label concessions and modifications. Unquestionably, TDRs will be prominent and what's most important is whether bankers can offer reasonable terms to ensure steady economic recovery, which will then be beneficial for all. Keep reading to learn more.
How the CARES Act Addresses TDRs
According to Section 4013 of the CARES Act, a financial organization can "suspend any determination of loans modified as a result of COVID-19 as being troubled debt restructurings. Federal banking agencies and the National Credit Union Administration must defer to a financial institution to make a suspension. Such elections may begin on March 1, 2020 and last no later than the earlier of (i) 60 days after the lifting of the COVID-19 national health emergency and (ii) December 31, 2020 (the “Applicable Period”)."Pursuant to Section 4013, such suspensions will be applicable for the term of the loan modification, but solely with respect to any modification (including forbearance agreements, interest rate modifications, repayment plans and any other similar arrangement that defers or delays the payment of principal or interest) that occurs during the Applicable Period for a loan that was not more than 30 days past due as of December 31, 2019." In short, if coronavirus-related changes are made, they should not be described as a TDR. Further, any modified loans under the CARES Act will not affect any of the associated bank's risk-based capital requirements. Credit unions won't have to worry about this until 2021 when they are then required to work with risk-based capital rules.
