On Oct. 24, the Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency issued supervisory guidance regarding troubled debt restructurings (TDRs).
TDRs are defined under generally accepted accounting principles (GAAP) as concessions that creditors would otherwise not consider granting to debtors due to economic or legal reasons related to the debtors’ financial difficulties. Creditors restructure troubled debts to improve loan performance and reduce credit risk.
The guidance reiterates existing policy related to the accounting treatment and credit risk grading of loans that have undergone TDRs. The guidance also discusses the definition of collateral-dependent loans and the circumstances in which charge-offs are required for TDRs.
A loan modified as a TDR can be in either accrual or nonaccrual status when modified. If in nonaccrual status, the loan can be restored to accrual status while a TDR by performing a current and well-documented credit analysis. A loan already in accrual status can be maintained by performing a credit analysis while also ensuring that the debtor is able to maintain a sustained repayment period of at least six months.
The guidance describes credit risk classification and clarifies that while most TDR loans will have a classified risk rating (due to the requirement of having a documented financial difficulty on the part of the debtor), such a rating is not automatic, and the loan doesn’t have to remain in an adverse risk rating forever. The guidance again states that a credit analysis should be done to determine the correct risk rating for the loan.
Finally, the guidance clarifies the existing policy regarding defining collateral-dependent loans. All TDR loans are considered impaired loans under GAAP, and all impaired loans must be judged to determine whether they are collateral-dependent to conclude the level of impairment. The guidance explains what must be evaluated to come to that determination. For more information on TDRs, you can view the Federal Reserve Board of Governors’ version of the interagency guidance here: http://www.federalreserve.gov/bankinforeg/srletters/sr1317a1.pdf.