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modification is short term (i.e., 12 months or less). Rather, the bank must collectively consider
the following factors, which may indicate the delay is insignificant:
•
The amount of the restructured payments subject to the delay is insignificant relative to the
unpaid principal or collateral value of the debt and will result in an insignificant shortfall in
the contractual amount due.
•
The delay in timing of the restructuring payments period is insignificant relative to any one
of the following:
‒
The frequency of payments due under the debt
‒
The debt’s original contractual maturity
‒
The debt’s original expected duration
If the loan has been previously restructured, an entity shall consider the cumulative effect of the
past restructurings when determining whether a delay in payment resulting from the most recent
restructuring is insignificant.
Facts
A bank originated an SFR mortgage that is HFI. At origination, the borrower’s income
was the primary source of repayment and the underlying collateral was the secondary source of
repayment. There is no other source of repayment. The borrower files for Chapter 7 bankruptcy.
The bankruptcy court discharges the borrower’s obligation to the bank and the borrower does not
reaffirm the debt. Accordingly, after the bankruptcy proceedings are completed, the bank’s only
recourse is to take possession of the collateral. Therefore, if the bank does not receive contractual
mortgage payments, it can foreclose on the property, but the bank cannot pursue the borrower
personally for any deficiencies. Even if the borrower has been making payments, the borrower’s
continued ability and willingness to make voluntary payments is uncertain.
Question 37
How should the bank report the discharged debt in the call report?
Staff Response
The discharged debt should be reported as a loan in the call report. The call report instructions
glossary states that a loan is generally an extension of credit resulting from direct negotiations
between a lender and a borrower. That definition is consistent with GAAP, which defines a loan
as a contractual right to receive money on demand or on fixed or determinable dates and is
recognized as an asset in the creditor’s statement of financial position. The discharge of a
secured debt does not eliminate the bank’s contractual right to receive money on demand or on
fixed or determinable dates; only the debtor’s personal liability on the debt has been eliminated.
The discharged debt should not be reported as OREO because the bank does not have physical
possession or legal title to the collateral (see Topic 5A, question 2).
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2A. Troubled Debt Restructurings
Bank Accounting Advisory Series
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August 2018
Question 38
Is the secured consumer loan discharged in Chapter 7 bankruptcy a TDR?
Staff Response
Yes. A restructuring constitutes a TDR if a concession is granted for economic or legal reasons
related to the borrower’s financial difficulties. The bankruptcy filing indicates the borrower is
experiencing financial distress (see question 20) and the release of the borrower’s personal
liability (the discharge) as ordered by the bankruptcy court is a concession.
ASC 310-40-15-6 states that a concession can be imposed by a law or court. Additionally,
ASC 310-40-15-10 specifically states that TDRs consummated under reorganization,
arrangement, or other provisions of the Federal Bankruptcy Act or other federal statutes are
within the scope of ASC 310-40. Therefore, the bankruptcy court’s discharge of the borrower’s
debt is a concession for the purpose of determining whether the restructured loan is a TDR.
Question 39
How should the bank account for the TDR?
Staff Response
The restructured loan is collateral dependent. The bank should, therefore, establish an ALLL in
accordance with ASC 310-10 and charge off the excess of the loan’s recorded investment over
the fair value of the collateral as uncollectible. The bank should place the remaining balance on
nonaccrual. The bankruptcy court “removed” the borrower (the primary source of repayment)
from responsibility to continue to make payments called for by the original loan agreement. As
such, the TDR is collateral dependent because repayment depends solely on the collateral.
Facts
A bank modifies a secured loan in a TDR and measures impairment using the present
value of the expected future cash flows discounted at the loan’s original effective interest rate
because the loan is not collateral dependent. The modified contractual terms require a balloon
payment at maturity. The current collateral value is less than the scheduled balloon payment.
Question 40
Is it appropriate for the bank to presume the borrower will be able to repay or refinance at
maturity?
Staff Response
No. When a contractual balloon payment is required at maturity under the modified terms of a
TDR loan that is not collateral dependent, significant uncertainty may exist regarding the
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2A. Troubled Debt Restructurings
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August 2018
troubled borrower’s ability to refinance or repay the debt at maturity.
In accordance with ASC 310-10-35-26, when estimating expected future cash flows for
impairment measurement purposes, the bank should consider all available evidence, with greater
weight given to evidence that can be verified objectively. When no sources of cash flows are
reasonably expected to be available to support the assumption that the borrower will be able to
repay or refinance the secured loan at maturity, an acceptable approach for estimating expected
future cash flows can be to base the expected payment at maturity on the current fair value of the
collateral, less estimated costs to sell.
The fair value of the collateral should be supported by a current appraisal or other similar timely
evaluation. Using the fair value of the collateral, less selling costs, in lieu of the balloon payment
due at maturity, does not suggest a 100 percent probability of default at renewal. Rather, using
the fair value recognizes the value inherent in the collateral to satisfy repayment should
refinancing efforts prove unsuccessful.
However, if the contractual balloon payment at maturity is lower than the fair value of the
collateral, less estimated costs to sell, the balloon payment amount should be used as the final
cash flow in the impairment analysis since there is no collateral deficiency.
Facts
A bank modifies a loan to a borrower in a TDR. The bank incurs certain costs directly
related to the modification, including appraisal costs. The bank charges the borrower a general
fee for the modification and adds the fee to the modified loan balance.
Question 41
How should the bank account for these direct costs incurred in a TDR and for the modification
fee charged to the borrower?
Staff Response
Consistent with ASC 310-40-25-1, OCC staff believes that the bank should expense the appraisal
and other direct costs associated with the TDR when incurred. Likewise, consistent with
ASC 310-20-35-12, the bank should apply the fee received in connection with the TDR to reduce
the recorded investment in the loan. Thus, the bank should defer recognition of the fee income
associated with the TDR.
Question 42
What is the classification and measurement guidance in GAAP for government-guaranteed
mortgage loans upon a bank’s foreclosure of the property that collateralizes the loan?
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