Today, March 19, 2020, FDIC Chairman Jelena McWilliams sent a letter to the Financial Accounting Standard Board (“FASB”), the body that is responsible for establishing U.S. generally accepted accounting practices (“U.S. GAAP”). The Chairman’s letter requests that FASB take three specific actions to ease the impact of certain U.S. GAAP standards in light of the economic conditions created by the COVID-19 pandemic. Specifically, the letter requests that FASB (i) announce that loan modifications offered to borrowers affected by COVID-19 will not be classified as troubled debt restructuring (“TDR”), (ii) provide that banks that are already subject to the current expected credit loss methodology (“CECL”) may postpone CECL implementation, and (ii) delay the ongoing phase-in of CECL.
The three requests are described in more detail below.
First, the letter urges FASB to exclude COVID-19-related modifications from being considered a concession when determining TDR classifications. Under current FASB standards, certain loan modifications – such as lowering interest rates, forgiving principal, or extending loan repayment schedules – may be classified as a TDR, triggering special regulatory reporting, tracking, and accounting requirements that can be burdensome for both creditors and debtors. The letter suggests that a clear statement from FASB that loan modifications and payment extensions offered to borrowers affected by COVID-19 would not be classified as a TDR might encourage banks to work with such borrowers and mitigate the economic impacts of the pandemic.
Second, the letter encourages FASB to delay the implementation of CECL for banks that are already subject to this new standard. At a high level, CECL requires creditors to use economic modeling to estimate credit losses over the life a loan, book loss reserves upfront (rather than when the loss becomes likely to be incurred), and adjust as economic conditions change. CECL is currently being implemented in stages between January 2020 and January 2023, and will have a significant impact on banks’ earnings and regulatory capital The letter requests that FASB provide that banks that are already subject to CECL have the option to postpone implementation, which will encourage more lending.
Third, the letter asks that FASB impose a moratorium on the implementation of CECL for financial institutions not yet subject to the requirements. As mentioned previously certain companies (i.e., SEC filers) became subject to CECL beginning January 2020, but other public and private entities are not subject to CECL until January 2023.
In a statement released along with the letter, Chairman McWilliams stated: “The nation’s banking industry is responding to rapidly evolving business conditions that are unprecedented in our history. To support the industry’s efforts to focus on their employees and customers, I encourage FASB to take these much needed actions to allow banks to help their communities at this time of need.”