A revised Paycheck Protection Program isn’t the only Christmas gift banks received in the latest stimulus bill.
The $892 billion package — which was approved by Congress this week and now awaits the signature of President Trump — also includes two provisions that give banks additional flexibility in accounting for problem loans.
The first postpones for another year the start date of the Current Expected Credit Losses accounting standard, which requires banks to estimate credit losses at origination. The second allows banks, for the next 12 months, to delay categorizing pandemic-related loan modifications as troubled debt restructurings.
The CECL extension and the delay in loan classification were both due to end Dec. 31.
The latter provision was welcome news at the $725 million-asset Walden Savings Bank, in Montgomery, N.Y. President and CEO Derrik Wynkoop said the ability to keep loans that have been in deferral since the early stages of the pandemic out of the troubled debt restructuring pile gives banks greater flexibility to work with borrowers who are still struggling. Roughly $11 million of loans, most tied to the food and hospitality sectors, are still in deferral, Wynkoop said.
“Let’s face it. The first [stimulus bill] contemplated that we’d be on the backside of this pandemic by now and unfortunately we’re knee-deep in a second wave,” Wynkoop said. “So moving out the date gives us more tools in our toolbox to work with borrowers who are still not out of the woods. Had this not been in the latest legislation, we would have been in a situation where we would have to have some very difficult conversations beginning in the new year.”
In the spring, the Coronavirus Aid, Relief and Economic Security Act provided temporary regulatory relief to financial institutions so they could focus on serving their customers during the pandemic. Among the various measures, the ability to suspend troubled debt restructuring classification was particularly helpful as it allows banks to modify or adjust customers’ loan terms and defer loan payments without counting those loans as troubled debt restructurings.
For years, banks had mostly been keeping loan delinquencies at bay. But when the pandemic hit, noncurrent loans began rising, jumping $7 billion between the fourth quarter of 2019 and the first quarter of this year and rising another $15.9 billion by the end of the second quarter, according to data from the Federal Deposit Insurance Corp. By the end of the third quarter, noncurrent loans had risen another $9.3 billion.
Keeping those loans out of the troubled debt restructuring bucket has been crucial for banks because it means those loans don’t have to be reviewed for impairment and banks don’t have to boost loan-loss reserves to cover them. Plus, any loan classified as a troubled debt restructuring retains that classification, even if the borrower returns to normal payments.
This fall, as the end-of-year expiration date neared for those provisions and others, bankers and trade groups
In a Dec. 9 letter to lawmakers, the American Bankers Association called the troubled debt restructuring relief a “critical economic response tool” and warned that “the potential impact on bank capital will deplete the available funding for future lending that communities need to spur the economic recovery.”
Ending the relief too soon would “both slow the pace of future needed modifications, including forbearance, and may force banks to reduce the availability of certain modifications,” the group wrote. “Expiration also amounts to changing the ‘rules’ in the middle of the health crisis, resulting in confusion for borrowers, muddled modification reporting for investors and potentially different examination conclusions for modifications that occur on either side of a day on the calendar.”
Analyst Chris Marinac of Janney Montgomery Scott agreed, saying additional forbearance is a lifeline as cases of COVID-19 keep rising and the nationwide vaccine rollout is just beginning.
“It provides a safety valve for the businesses that really need it,” Marinac said. “We at least have an option to apply to those borrowers to try to keep them alive for another three to six months to bridge the gap.”
Also useful in regulatory relief was the delayed start date for the Financial Accounting Standards Board’s CECL rule, which took effect this year for larger banks and will begin in 2023 for smaller banks. CECL requires banks to recognize potential future credit losses over the life of the loan at the time the loan is originated. Most publicly-traded banks adopted CECL on Jan. 1, but the CARES Act granted the option to revert to previous accounting standards for the remainder of the year.
Forty-five out of 205 banks that had to comply with CECL this year took advantage of the delayed start, according to the ABA. Community banks do not have to adopt the rule until 2023, but can do so if they are ready.
Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, said the benefits of both extensions are clear. Banks, he said, can “focus more on immediate needs” such as PPP lending and the PPP loan forgiveness process.
“Once you get in that [troubled debt restructuring category, it’s like you can’t get out,” Merski said. “So that’s extended out for another year and that was really hard fought.”
And for many banks, pushing out CECL gives greater clarity in how much they need to set aside for loan losses, Marinac added.
“If you adopted CECL, then it would be a tougher charge because we simply didn’t know" how bad loan losses would be, he said. “So I think a lot of people who adopted were stuck with big reserve builds in the first quarter and secord quarter because the models drove them to that.”
There is a chance Trump will not sign the stimulus bill into law. In a video Tuesday night, Trump called the bill "a disgrace" and threatened a veto unless Congress amended it to increase the $600 direct payments to individuals to $2,000. As of midday Wednesday, Congress had not delivered revised legislation.
