By Kevin McLaughlin
Attendees at the RMA Annual Risk Management Conference filled a meeting room to capacity to hear regulators and bankers describe the ins and outs of troubled debt restructurings (TDRs).
Darrin Benhart of the Office of the Comptroller of the Currency (OCC) called for consistency when banks assess whether or not a loan is a TDR. Consistent policies and procedures make regulators more comfortable when examining the bank. In calling for consistency, however, Benhart admitted there are no bright lines and TDR determinations involve judgment.
Two conditions‑the borrower has experienced financial difficulty and the lender has granted a concession to the borrower‑must exist for a loan modification to be considered a TDR. Citing FASB Accounting Update 2011-02 (TDRs), Benhart said a creditor grants a concession when, as a result of the restructuring, it does not expect to collect all amounts due, including interest accrued at the original contract date. Second, a creditor grants a concession when the nature and amount of additional collateral or guarantees from the debtor does not serve as adequate compensation for the other terms of the restructuring. Third, a creditor may be granting a concession when the borrower would not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt.
Brian Valenti of the Federal Reserve Board described multinote splits sometimes used in TDRs. The A note is the portion of the outstanding debt that may be placed back on accrual status given certain situations, such as that the creditor can be reasonably assured of repayment under modified terms, there is no doubt regarding full collection of principal and interest, and there is sustained payment performance for a reasonable time. The portion of the debt that is not reasonably assured of repayment, the B note, is charged off.
TDRs can be measured for impairment in the following ways, Valenti said. TDRS that are collateral dependent are measured for loss on the collateral value less the cost to sell. TDRs with modifications are measured on the present value of cash flows discounted at the loan’s original effective date. Valenti closed by urging banks to properly report TDRs.
From the bankers’ side, Robert Mace of Huntington National Bank identified four TDR challenges: identification, defining market terms, reporting, and removing the TDR designation. Once again, financial difficulties and concessions must be clearly and consistently determined. Factors included in determining whether a concession has been granted are the reason for the modification, and the maturity, rate, amortization, collateral, guarantors, and covenants in the modification.
According to R. Scott Purdy of BMO Harris, 90% of TDRs are simply and clearly identified, while 10% are ambiguous. Purdy says he consults with his bank’s Finance Departmentfor help in determining the status of ambiguous loans. Purdy also offered attendees a series of questions to ask in determining whether a modified loan is a TDR.