When Is a Loan Modification Considered a Troubled Debt Restructuring?

 Posted on January 21, 2022 in Debt Collection

There are a variety of ways that creditors may be able to address delinquent debts. While pursuing foreclosures or repossessions may be the best option in many cases, creditors may be able to mitigate their losses and ensure that debtors will be able to make ongoing payments by negotiating loan modifications. However, in some cases, these modifications may be classified as troubled debt restructurings (TDRs), and they may need to be reported to the appropriate regulatory agencies. By understanding when loan modifications are considered to be TDRs, creditors can ensure that they are in compliance with all applicable laws and regulations.

What Is a TDR?

Creditors may work with debtors to make multiple types of loan modifications that are meant to help a debtor afford ongoing payments and prevent the default of a loan. A loan modification may be considered a troubled debt restructuring if a borrower has experienced financial hardship and a lender makes concessions that typically would not be made in other situations. While defaulting on one or more payments may be an indication of financial hardship for a debtor, other financial issues that may affect a person’s ability to make payments may also be considered, such as the loss of a job. Concessions that a lender may make may include:

• A permanent reduction of the loan’s interest rate
• Forgiveness of some of the principal of the loan
• A reduction in the amount of interest that has accrued on the loan
• Extension of the term of a loan at an interest rate that is below the current market rate

Modifications that are considered to be TDRs may need to be reported as nonaccrual assets, and they may need to be considered when estimating a creditor’s Allowance for Loan and Lease Losses (ALLL). In some cases, these loans may need to be charged off.

Because many borrowers have experienced financial difficulties during the COVID-19 pandemic, creditors have been encouraged to work with debtors to mitigate the adverse effects they may experience due to defaults or delinquent payments. Creditors who make short-term modifications in good faith for borrowers who are no more than 30 days past-due on their obligations may not be required to classify modifications as TDRs. These modifications must generally last for six months or less, and they may include deferred payments, waived fees, or extensions of repayment terms.

Contact Our Chicago Creditor Loan Modification Attorneys

By determining how to address situations where debtors are experiencing financial hardship, creditors may be able to negotiate loan modifications while minimizing their financial losses and ensuring that they meet all of their reporting requirements. If you have questions about the legal issues that may affect loan modifications, contact our Chicago debt restructuring lawyers today by calling 312-704-0771.

Sources:

https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum12/sisummer12-article4.pdf

https://www.fdic.gov/coronavirus/faq-fi.pdf

https://www.occ.gov/news-issuances/news-releases/2020/nr-ia-2020-39a.pdf