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COVID-19 von Briesen Task Force Resource: Interagency Statement Encourages Lenders and Borrowers to Proactively Enter into Short Term Loan Modifications

A late March 2020 Interagency Statement (the “Interagency Statement”) encourages both lenders and borrowers to be proactive and not wait until borrowers experience the full economic impact of the COVID-19 pandemic before working together to effect short term loan modifications. The Interagency Statement, issued on March 22, 2020, is entitled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by Coronavirus.”

Lenders have greater latitude to enter into loan modifications that are not accounted for as troubled debt restructurings. The Interagency Statement provides that, generally, a loan modification does not constitute a troubled debt restructuring if such loan modification is:

  1. made with respect to a borrower that is current on existing loans;

  2. provides short-term relief; and

  3. made in good faith in response to COVID-19.

Current on Existing Loans. This factor is most important with respect to timing. The borrower must be less than 30 days past due on regularly scheduled payments. It is in both the lenders’ and borrowers’ best interests to make necessary loan modifications before borrowers are no longer current on existing loans.

Short Term. The Interagency Statement does not provide much guidance regarding what constitutes “short term” for purposes of a loan modification. The Interagency Statement provides as an example of “short term” a 6 month payment deferral. However, as noted in a footnote to the Interagency Statement, any such payment deferral must be “insignificant,” which determination may include whether the amount being deferred is insignificant relative to the outstanding principal amount or collateral value and whether any deferral period is insignificant relative to the payment frequency or maturity date.

Made in Good Faith in Response to COVID-19. The borrower must be experiencing short-term financial difficulties as a consequence of the COVID-19 pandemic.

One of the more important aspects of the Interagency Statement is to encourage lenders to establish loan modification programs (as opposed to loan modifications entered into on a case by case basis). The Interagency Statement provides that if a loan modification program is designed to provide short-term relief to borrowers adversely affected by the COVID-19 pandemic, any borrower that is current on existing loans will not be considered financially distressed. Accordingly, any loan modification with a borrower current on existing loans and made pursuant to such loan modification program will not constitute a troubled debt restructuring.

Regardless of whether lender or borrower, if you anticipate the need for a loan modification as a result of the COVID-19 pandemic, now is the time to begin discussions.

©2022 von Briesen & Roper, s.cNational Law Review, Volume X, Number 101
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About this Author

David Cisar, Von Briesen Roper Law Firm, Finance, Corporate and Real Estate Law Attorney
Attorney

Dave Cisar Co-Chairs the Banking and Commercial Finance Section. He draws on his 35 years of experience to counsel businesses on governance, financing, contracting, real estate, acquisitions and strategic planning.

Dave has a strong focus on the Uniform Commercial Code (“UCC”) and represents financial institutions and businesses in all aspects of commercial finance and other commercial transactions including terms and conditions of sales, commercial loan agreements, inter-creditor agreements, participation agreements, syndicated loans, asset-...

414-287-1224
Brion Winters, von Briesen Roper Law Firm, Milwaukee, Corporate and Finance Law Attorney
Attorney

Brion is a Shareholder at von Briesen with a unique background and skillset that service the diverse needs of his clients.  Brion’s clients come in all shapes and sizes from closely-held businesses, start-up companies and individuals to well-established financial institutions and municipalities. Brion’s commitment to customer service, attention to detail and unending desire to provide value serves his business, banking, developer, municipal and individual clients well.  

In 2008, Brion joined von Briesen from M&I Wealth Management where he...

414-287-1561
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