The Massachusetts Division of Banks has issued guidance on the treatment of certain loan modifications for home mortgage loans where the borrowers are not delinquent but whose current loan balance exceeds the value of the property securing the loan. According to the guidance, entitled Guidance Relative to Residential Mortgage Loan Modifications for Non-Delinquent Borrowers and Troubled Debt Restructuring (TDR), released on December 27, 2012, the Division determined that, in certain circumstances, a lender may choose to restructure or modify a home mortgage loan under the revision in mortgage terms statute (Chapter 183, Section 63A of the General Laws of Massachusetts) and that loan may not necessarily have to be treated as a TDR. Specifically, the guidance clarifies that, in cases where both the borrower and current lender wish to modify the terms of a mortgage loan that is not delinquent, the fact that the collateral value has fallen below the outstanding loan amount does not require the credit to be classified as a TDR provided that the borrower is performing satisfactorily under the mortgage loan and is not experiencing financial difficulties. The guidance recommends that a lender consider all facts and circumstances in determining whether a borrower is experiencing financial difficulty and whether the lender is granting a concession. Lenders should have policies and procedures in place to address and document all modification requests in a consistent manner, and perform and document the analysis in making the classification determination in each case, according to the Division.
Nutter Notes: The Division’s guidance addresses TDR classification under Accounting Standards Codification (ASC) Subtopic 310-40: Receivables – Troubled Debt Restructurings by Creditors. ASC Subtopic 310-40 was updated by the Financial Accounting Standards Board (FASB) in April 2011 with Accounting Standards Update ASU 2011-02: A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. FASB ASU No. 2011-02 is effective for public companies for the first interim or annual period beginning on or after June 15, 2011. The amendments are effective for nonpublic companies for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. The accounting guidelines define a TDR as a loan modification in which the creditor grants a concession that it would not otherwise consider for economic or legal reasons related to the debtor’s financial difficulties. The accounting guidelines require two conditions to be present to classify a loan modification as a TDR: the debtor is experiencing financial difficulties and the creditor grants a concession relative to the loan terms as a result of those financial difficulties. The Division’s guidance points out that existing accounting guidance provides possible indicators of when those conditions exist, though all facts and circumstances must be considered when making a TDR determination.