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A Lender’s Guide to Workouts – Before and After COVID-19

During an April 17 Risk Readiness Special Coverage webinar, Sidney Levinson, Partner, Debevoise & Plimpton, and David Sewell, Counsel, Debevoise & Plimpton provided an overview of workouts pre-COVID-19 and discussed how the paradigm has shifted as a result of the pandemic.

Financial institutions will often consider a workout before filing for Chapter 11. In the current climate, the advantages of avoiding Chapter 11 and the associated administrative expenses, operational disruption, and potential loss of revenue far outweigh the disadvantages. Similarly, troubled debt restructurings (TDRs) should be avoided if possible since they are subject to additional regulatory reporting, tracking, and accounting requirements by the financial institution.

In response to COVID-19, the agencies have provided guidance impacting the standard procedures to TDRs and other loan modifications and deferments. The CARES Act encourages financial institutions to work proactively with borrowers and provides various borrower-protective provisions including temporarily suspending requirements under U.S. Generally Accepted Accounting Principles (GAAP) related to TDRs; providing a forbearance program for federally-backed mortgage loans; and protecting borrowers from negative credit reporting due to loan accommodations related to COVID-19.

To qualify as an eligible loan modification under Section 4013 of the CARES Act, the modification must be related to COVID-19; not more than 30 days past due as of December 31, 2019; and executed between March 1, 2020, and the earlier of (i) 60 days after the date of termination of the National Emergency or (ii) December 31, 2020. Even if a loan modification is not eligible under Section 4013, lenders should evaluate whether TDR accounting treatment must be applied.

Revised interagency guidance from the Fed, FDIC, OCC, and CFPB on April 7 encouraged financial institutions “to work prudently with borrowers affected by the pandemic.” The speakers pointed out that the bottom line message for lenders appears to be that normal course regulatory and supervisory consequences for loan modifications may not apply when accommodations are made to assist in the pandemic response.

A recording of the webinar is available for download here.