Reporting Loan Modifications with the Implementation of CECL
This blog was co-authored by my colleagues, David Heneke, Principal and Andy Oster, Manager
As a part of the adoption of CECL, institutions are also adopting ASU 2022-02 Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This standard eliminates the concept of a troubled debt restructuring (TDR). As a result of this elimination, it removes the requirement to individually evaluate TDRs for impairment as CECL is already calculating lifetime losses for all loans in the portfolio. Under CECL, you are allowed to individually evaluate loans for allowance levels, but this evaluation is no longer predicated on the prior definition of an impaired loan. However, the standard did not eliminate the requirement for institutions to disclose information about loan modifications where the borrower is experiencing financial difficulty. Institutions should establish a process to determine if a loan modification meets these criteria, and thus would be included in its disclosures.
The first step in the process is to determine whether the modification is a new loan or a continuation of an existing loan. A loan modification would be classified as a new loan if:
- The terms of the new loan (including its interest rate) are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans, and
- The modification to the terms of the loan is more than minor. A modification is considered more than minor if the present value of the cash flow differs from the loan balance by greater than 10%.
In the context of determining whether a loan modification is required to be disclosed, institutions should focus on the first bullet point. If you cannot conclude the modification meets the first criteria, it is not considered a new loan, and the modification was made to a borrower experiencing financial difficulty and must be disclosed through the new enhanced disclosure requirements of the ASU. Institutions should establish appropriate internal controls to identify these loan modifications to borrowers experiencing financial difficulty to ensure these loans are appropriately disclosed on their call reports and financial statements.
Call report instructions indicate different disclosure requirements depending on whether institutions have adopted ASU 2022-02. The requirements are outlined below.
Banks
Credit Unions
The June 30, 2023 NCUA call report instructions note for Schedule A: “If you have adopted ASC Topic 326: Financial Instruments – Credit Losses (CECL), for borrowers experiencing financial difficulty report the number and amortized cost of loan modifications resulting in a new loan or a continuation of the current loan. Report loan modifications in the form of any of the following: principal forgiveness, an interest rate reduction, a significant payment delay, or a term extension (or a combination thereof). Covenant waivers and modification of contingent acceleration clauses are not considered term extensions. Upon adoption of CECL, which includes amendments by ASU 2022-02 – Troubled Debt Restructurings and Vintage Disclosures, report the number of loan modifications granted in Account 1000F and the amortized cost in Account 1001F starting from the implementation date of CECL, instead of TDRs.”
Financial Statement Disclosures
For financial statement disclosure, ASC 310-10-50 indicates that institutions should disclose any commitment to lend additional funds to borrowers experiencing financial difficulty. The financial impact, past due status, and commitment amount of the following loan modification types should be disclosed:
- Principal forgiveness
- Interest rate reduction
- Other-than-insignificant payment delays
- Term extensions, and
- Any combination of these modification types.
Institutions should develop a way to track such modifications, by modification type, on an individual loan basis to fulfill the disclosure requirements.
Financial statement disclosure requirements are unchanged for institutions that have not adopted CECL.
How can we help?
CLA’s Financial Services Group is filled with experienced professionals, here to assist your institution with your CECL and Loan Modification needs. In addition, we did a full series of blog posts on CECL in 2021. See the first blog post from July 2021 here.
Brittany has more than twelve years of experience and specializing in providing audit and accounting services to financial institutions. In addition to planning, managing and performing financial statement audits for institutions ranging in total assets from $10 million to $50 billion, she has performed engagements designed to test the adequacy of loan documentation and reserves, adherence to internal control policies, outsourced internal audit, and consulting engagements for various compliance requirements.
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