Assessments, Amendments To Incorporate Troubled Debt Restructuring Accounting Standards Update
Final rule.
CFR Part: "12 CFR Part 327"
RIN Number: "RIN 3064-AF85"
Citation: "87 FR 64348"
Page Number: "64348"
"Rules and Regulations"
Agency: "
SUMMARY: The
DATES: The final rule is effective
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
I. Policy Objective and Overview of Final Rule The Federal Deposit Insurance Act (FDI Act) requires that the
FOOTNOTE 1 12 U.S.C. 1817(b). END FOOTNOTE
FOOTNOTE 2 See Section 7(b)(1)(C) of the FDI Act, 12 U.S.C. 1817(b)(1)(C). END FOOTNOTE
In 2022, the
FOOTNOTE 3 FASB Accounting Standards Update (ASU) No. 2022-02, "Financial Instruments--Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,"
FOOTNOTE 4 For deposit insurance assessment purposes, large IDIs are generally those that have
In order to ensure that the risk-based assessment system continues to capture the risk posed by restructured loans, the
II. Background
A. Deposit Insurance Assessments
The
FOOTNOTE 5 See 12 CFR 327.3(b)(1). END FOOTNOTE
FOOTNOTE 6 See 12 CFR 327.5. END FOOTNOTE
An IDI's assessment rate is calculated using different methods dependent upon whether the IDI is classified for deposit insurance assessment purposes as a small, large, or highly complex bank. /7/ Large and highly complex banks are assessed using a scorecard approach that combines CAMELS ratings and certain forward-looking financial measures to assess the risk that a large or highly complex bank poses to the
FOOTNOTE 7 See 12 CFR 327.8(e), (f), and (g). END FOOTNOTE
FOOTNOTE 8 See 12 CFR 327.16(b); see also 76 FR 10672 (
B. Credit Quality Measure
Both the large bank and the highly complex bank scorecards include a credit quality measure. The credit quality measure is the greater of (1) the criticized and classified items to the sum of Tier 1 capital and reserves score or (2) the underperforming assets to the sum of Tier 1 capital and reserves score. /9/ Each risk measure, including the criticized and classified items ratio and the underperforming assets ratio, is converted to a score between 0 and 100 based upon minimum and maximum cutoff values. /10/
FOOTNOTE 9 See 12 CFR 327.16(b)(1)(ii)(A)(2)(iv). END FOOTNOTE
FOOTNOTE 10 See 12 CFR part 327, appendix B. END FOOTNOTE
The underperforming assets ratio is described identically in the large and highly complex bank scorecards as the sum of loans that are 30 days or more past due and still accruing interest, nonaccrual loans, restructured loans (including restructured 1-4 family loans), and other real estate owned (ORE), excluding the maximum amount recoverable from the
FOOTNOTE 11 See 12 CFR part 327, appendix A. END FOOTNOTE
The specific data used to identify the "restructured loans" referenced in the above description are those items that banks disclose in their Call Report on Schedule RC-C, Part I, Memorandum items 1.a. through 1.g, "Loans restructured in troubled debt restructurings that are in compliance with their modified terms." The portion of restructured loans that are guaranteed or insured by the
C. Concentration Measure
Both the large and highly complex bank scorecards also include a concentration measure. The concentration measure is the greater of (1) the higher-risk assets to the sum of Tier 1 capital and reserves score or (2) the growth-adjusted portfolio concentrations score. /12/ Each risk measure, including the higher risk assets ratio and the growth-adjusted portfolio concentrations ratio, is converted to a score between 0 and 100 based upon minimum and maximum cutoff values. /13/ The higher-risk assets ratio captures the risk associated with concentrated lending in higher-risk areas. Higher-risk assets include construction and development (C&D) loans, higher-risk commercial and industrial (C&I) loans, higher-risk consumer loans, nontraditional mortgage loans, and higher-risk securitizations. /14/
FOOTNOTE 12 See 12 CFR 327.16(b)(1)(ii)(A)(2)(iii). END FOOTNOTE
FOOTNOTE 13 See 12 CFR part 327, appendix C. END FOOTNOTE
FOOTNOTE 14 Id. END FOOTNOTE
Higher-risk C&I loans are defined, in part, based on whether the loan is owed to the bank by a higher-risk C&I borrower, which includes, among other things, a borrower that obtains a refinance of an existing C&I loan, subject to certain conditions. Higher-risk consumer loans are defined as all consumer loans where, as of origination, or, if the loan has been refinanced, as of refinance, the probability of default within two years is greater than 20 percent, excluding those consumer loans that meet the definition of a nontraditional mortgage loan. A refinance for purposes of higher-risk C&I loans and higher-risk consumer loans is defined in the assessment regulations and explicitly does not include modifications to a loan that would otherwise meet the definition of a refinance, but that results in the classification of a loan as a TDR.
D. FASB's Elimination of Troubled Debt Restructurings
On
FOOTNOTE 15 FASB Accounting Standards Update No. 2022-02, "Financial Instruments--Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures," available at https://www.fasb.org/Page/ShowPdf?path=ASU+2022-02.pdf. END FOOTNOTE
FOOTNOTE 16 FASB Accounting Standards Update No. 2016-13, "Financial Instruments--Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,"
FOOTNOTE 17 FASB Accounting Standards Update No. 2022-02, at BC19, pp. 57-58. END FOOTNOTE
The update eliminates the recognition of TDRs and, instead, introduces new and enhanced financial statement disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty, or "modifications to borrowers experiencing financial difficulty." Such modifications are limited to those that result in principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or term extensions in the current reporting period. Modifications to borrowers experiencing financial difficulty may be different from those previously captured in TDR disclosures because an entity no longer would have to determine whether the creditor has granted a concession, which is a current requirement to determine whether a modification represents a TDR. The update requires entities to disclose information about (a) the types of modifications provided, disaggregated by modification type, (b) the expected financial effect of those modifications, and (c) the performance of the loans after modification.
For entities that have adopted CECL, ASU 2022-02 is effective for fiscal years beginning after
FOOTNOTE 18 Generally, entities that are
FOOTNOTE 19 See Financial Institution Letter (FIL) 17-2022, Consolidated Reports of Condition and Income for First Quarter 2022. See also Supplemental Instructions,
III. Discussion of Comments Received
On
FOOTNOTE 20 87 FR 45023 (
The
The commenters also asked the
With respect to these comments, the
FOOTNOTE 21 76 FR at 10688 (
All commenters supported the removal of TDRs from the large and highly complex bank scorecards, and one commenter stated that the alternative of requiring large banks to continue to report TDRs solely for purposes of calculating deposit insurance assessments would impose significant burdens whose costs would not justify the benefits. In the absence of TDRs, the
The Associations also wrote that replacing TDRs with modifications to borrowers experiencing financial difficulty would result in double-counting of these loans in the underperforming asset ratio because such modifications include both performing and non-performing loans. Currently, reporting by early adopters distinguishes between performing and non-performing modifications to borrowers experiencing financial difficulty, thereby ensuring that such loans will not be double-counted in the underperforming assets ratio. The
All commenters suggested that including modifications to borrowers experiencing financial difficulty in large bank pricing would discourage banks from working with their borrowers and would result in pro-cyclical assessments. With respect to this concern, the
FOOTNOTE 22 See, e.g., FDIC Press Release 49-2020, "Agencies Issue Revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus," dated
All commenters asked the
As discussed above, the
As commenters noted, and as described below in the Expected Effects section, the
Modifications to borrowers experiencing financial difficulty are restructured loans and, in the
Accounting for such risk is particularly important once institutions implement ASU 2022-02 and no longer report TDRs, which for most institutions will be
In light of commenters' concerns about how modifications to borrowers experiencing financial difficulty will be reported, and given that there may be some uncertainty over how the inclusion of modifications to borrowers experiencing financial difficulty in lieu of TDRs might affect underperforming assets and assessments, the
IV. The Final Rule
A. Summary
The
B. Underperforming Assets Ratio
The
C. Higher-Risk Assets Ratio
The
V. Expected Effects
As of
FOOTNOTE 23 FDIC Call Report data
The primary expected effect of the final rule is the change in underperforming assets, and the consequent change in assessment rates, that will occur as a result of the difference between the amount of TDRs that most banks are currently reporting and the amount of modifications to borrowers experiencing financial difficulty that banks will report upon adoption of ASU 2022-02. The effect of this final rule on assessments paid by large and highly complex banks is difficult to estimate since most banks have not yet implemented ASU 2022-02 and are not reporting modifications to borrowers experiencing financial difficulty, and the
In general, the
The
The
Alternatively, as an extreme and unlikely scenario, if all large and highly complex banks had reported zero TDRs during a period when overall risk in the banking industry was higher, such as
Over time, however, large and highly complex banks will implement ASU 2022-02 and begin to report modifications to borrowers experiencing financial difficulties. As noted above, the effect on assessments will depend on how the newly reported modifications compare to the TDRs that would have been reported under the prior accounting standard. For example, if all large and highly complex banks had reported modifications to borrowers experiencing financial difficulty that were 25 percent greater than the TDRs reported as of
The analysis presented above serves as an illustrative example of potential effects of the final rule. The analysis does not estimate potential future modifications to borrowers experiencing financial difficulty or how those amounts, once reported, will compare to previously reported TDRs for a few reasons. First, banks were granted temporary relief from reporting TDRs that were modified due to the COVID-19 pandemic, so recent reporting of TDRs is likely lower than it may otherwise have been. /24/ Second, the amount of modifications or restructurings made by large or highly complex banks vary based on economic conditions and future economic conditions are uncertain. Third, as commenters noted, a restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider, while a modification to borrowers experiencing financial difficulty is not evaluated based on whether or not a concession has been granted. Finally, future Call Report revisions and instructions on how modifications to borrowers experiencing financial difficulties are required to be reported will affect the future reported amount of modifications to borrowers experiencing financial difficulty.
FOOTNOTE 24 On
With regard to the higher-risk assets ratio, the effect on assessments paid by large and highly complex banks is likely to be more muted. The assessment regulations define a higher-risk C&I or consumer loan as a loan or refinance that meets certain risk criteria. The final rule will exclude modifications to borrowers experiencing financial difficulty from the definition of a refinance for purposes of the higher-risk assets ratio. As a result, if a modification to a C&I or consumer loan results in the classification of the loan as a TDR, under the current regulations, or as a modification to borrowers experiencing financial difficulty, under the final rule, a large or highly complex bank will not have to re-evaluate whether the modified loan meets the definition of a higher-risk asset.
For example, if a higher-risk C&I loan was subsequently modified as a TDR or modification to borrowers experiencing financial difficulty, it will not be considered a refinance and, therefore, will continue to be considered a higher-risk asset. Conversely, if a C&I loan that does not meet the definition of a higher-risk asset was subsequently modified as a TDR or modification to borrowers experiencing financial difficulty, it will not be considered a refinance and, therefore, will not have to be re-evaluated to determine if it meets the definition of a higher-risk asset. The
VI. Alternatives Considered
The
One alternative would be to require banks to continue to report TDRs specifically for deposit insurance assessment purposes, even after they have adopted CECL and ASU 2022-02. This alternative would maintain consistency of the data used in the underperforming assets ratio and higher-risk assets ratio with prior reporting periods. However, and as one commenter noted, this alternative would impose additional reporting burden on large and highly complex banks. This alternative would also fail to recognize the potential usefulness of the new data on modifications to borrowers experiencing financial difficulty. Ultimately, the
The
The
VII. Effective Date and Application Date
The
VIII. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency, in connection with a final rule, to prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of a final rule on small entities. /25/ However, a regulatory flexibility analysis is not required if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The
FOOTNOTE 25 5 U.S.C.
FOOTNOTE 26 The SBA defines a small banking organization as having
FOOTNOTE 27 5 U.S.C. 601. END FOOTNOTE
Based on Call Report data as of
FOOTNOTE 28 FDIC Call Report data,
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) states that no agency may conduct or sponsor, nor is the respondent required to respond to, an information collection unless it displays a currently valid
FOOTNOTE 29 44 U.S.C. 3501-3521. END FOOTNOTE
C.
Section 302(a) of the
FOOTNOTE 30 12 U.S.C. 4802(a). END FOOTNOTE
FOOTNOTE 31 12 U.S.C. 4802(b). END FOOTNOTE
The final rule will not impose additional reporting, disclosure, or other new requirements on insured depository institutions, including small depository institutions, or on the customers of depository institutions. Accordingly, section 302 of RCDRIA does not apply. The
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act /32/ requires the Federal banking agencies to use plain language in all proposed and final rulemakings published in the
FOOTNOTE 32 Public Law 106-102, section 722, 113 Stat. 1338, 1471 (1999), 12 U.S.C. 4809. END FOOTNOTE
E. The Congressional Review Act
For purposes of the Congressional Review Act, the OMB makes a determination as to whether a final rule constitutes a "major" rule. /33/ If a rule is deemed a "major rule" by the OMB, the Congressional Review Act generally provides that the rule may not take effect until at least 60 days following its publication. /34/
FOOTNOTE 33 5 U.S.C.
FOOTNOTE 34 5 U.S.C. 801(a)(3). END FOOTNOTE
The Congressional Review Act defines a "major rule" as any rule that the Administrator of the
FOOTNOTE 35 5 U.S.C. 804(2). END FOOTNOTE
The OMB has determined that the final rule is a major rule for purposes of the Congressional Review Act. As required by the Congressional Review Act, the
List of Subjects in 12 CFR Part 327 Bank deposit insurance, Banks, Banking, Savings associations.
Authority and Issuance
For the reasons stated in the preamble, the
PART 327--ASSESSMENTS
1. The authority for 12 CFR part 327 continues to read as follows:
Authority:12 U.S.C. 1813, 1815, 1817-19, 1821.
2. Amend appendix A to subpart A in section IV by:
a. In the entries for "Balance Sheet Liquidity Ratio," "Potential Losses/Total Domestic Deposits (Loss Severity Measure)," and "Market Risk Measure for Highly Complex Institutions," redesignating footnotes 5, 6, and 7 as footnotes 6, 7, and 8, respectively;
b. Redesignating footnotes 5, 6, and 7 as footnotes 6, 7, and 8 at the end of the table;
c. Revising the entry for "Credit Quality Measure"; and
d. Adding new footnote 5 at the end of the table.
The revision and addition read as follows:
Appendix A to Subpart A of Part 327--Method To Derive Pricing Multipliers and Uniform Amount
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IV. Description of Scorecard Measures
Scorecard measures fn1 Description
* * * * * * *
Credit Quality Measure The credit quality score is the higher of the following two scores:
(1) Criticized and Classified Items/Tier 1 Capital and Reserves fn2 Sum of criticized and classified items divided by the sum of Tier 1 capital
and reserves. Criticized and classified items include items an institution or its primary Federal
regulator have graded "Special Mention" or worse and include retail items under Uniform Retail
Classification Guidelines, securities, funded and unfunded loans, other real estate owned (ORE),
other assets, and marked-to-market counterparty positions, less credit valuation adjustments. fn4
Criticized and classified items exclude loans and securities in trading books, and the amount
recoverable from the U.S. Government , its agencies, or Government-sponsored enterprises, under
guarantee or insurance provisions.
(2) Underperforming Assets/Tier 1 Capital and Reserves fn2 Sum of loans that are 30 days or more past due and still accruing interest,
nonaccrual loans, restructured loans fn5 (including restructured 1-4
family loans), and ORE, excluding the maximum amount recoverable from the U.S. Government , its
agencies, or government-sponsored enterprises, under guarantee or insurance provisions, divided by
a sum of Tier 1 capital and reserves.
* * * * * * *
fn1 The FDIC retains the flexibility, as part of the risk-based assessment system, without the necessity of additional notice-and-comment rulemaking, to update the minimum and maximum cutoff values for all measures used in the scorecard. The FDIC may update the minimum and maximum cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio in order to maintain an approximately similar distribution of higher-risk assets to Tier 1 capital and reserves ratio scores as reported prior to April 1, 2013 , or to avoid changing the overall amount of assessment revenue collected. 76 FR 10672, 10700 (February 25, 2011 ). The FDIC will review changes in the distribution of the higher-risk assets to Tier 1 capital and reserves ratio scores and the resulting effect on total assessments and risk differentiation between banks when determining changes to the cutoffs. The FDIC may update the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio more frequently than annually. The FDIC will provide banks with a minimum one quarter advance notice of changes in the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio with their quarterly deposit insurance invoice.
fn2 The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020 ), and 84 FR 4222 (Feb. 14, 2019 )), will be removed from the sum of Tier 1 capital and reserves.
* * * * * * *
fn4 A marked-to-market counterparty position is equal to the sum of the net marked-to-market derivative exposures for each counterparty. The net marked-to-market derivative exposure equals the sum of all positive marked-to-market exposures net of legally enforceable netting provisions and net of all collateral held under a legally enforceable CSA plus any exposure where excess collateral has been posted to the counterparty. For purposes of the Criticized and Classified Items/Tier 1 Capital and Reserves definition a marked-to-market counterparty position less any credit valuation adjustment can never be less than zero.
fn5 Restructured loans include troubled debt restructurings and modifications to borrowers experiencing financial difficulty, as these terms are defined in the glossary to the Call Report, as they may be amended from time to time.
*****
3. Amend appendix C to subpart A by:
a. In section I.A.2., under the heading "Definitions," revising the entry for "Refinance"; and
b. In section I.A.3., revising the "Refinance" section preceding section I.A.4.
The revisions read as follows:
Appendix C to Subpart A of Part 327--Description of Concentration Measures I. * * *
A. * * *
2. * * *
Definitions
*****
Refinance
For purposes of a C&I loan, a refinance includes:
(a) Replacing an original obligation by a new or modified obligation or loan agreement;
(b) Increasing the master commitment of the line of credit (but not adjusting sub-limits under the master commitment);
(c) Disbursing additional money other than amounts already committed to the borrower;
(d) Extending the legal maturity date;
(e) Rescheduling principal or interest payments to create or increase a balloon payment;
(f) Releasing a substantial amount of collateral;
(g) Consolidating multiple existing obligations; or
(h) Increasing or decreasing the interest rate.
A refinance of a C&I loan does not include a modification or series of modifications to a commercial loan other than as described above or modifications to a commercial loan that would otherwise meet this definition of refinance, but that result in the classification of a loan as a troubled debt restructuring (TDR) or a modification to borrowers experiencing financial difficulty, as these terms are defined in the glossary of the Call Report instructions, as they may be amended from time to time.
*****
3. * * *
Refinance
For purposes of higher-risk consumer loans, a refinance includes:
(a) Extending new credit or additional funds on an existing loan;
(b) Replacing an existing loan with a new or modified obligation;
(c) Consolidating multiple existing obligations;
(d) Disbursing additional funds to the borrower. Additional funds include a material disbursement of additional funds or, with respect to a line of credit, a material increase in the amount of the line of credit, but not a disbursement, draw, or the writing of convenience checks within the original limits of the line of credit. A material increase in the amount of a line of credit is defined as a 10 percent or greater increase in the quarter-end line of credit limit; however, a temporary increase in a credit card line of credit is not a material increase;
(e) Increasing or decreasing the interest rate (except as noted herein for credit card loans); or
(f) Rescheduling principal or interest payments to create or increase a balloon payment or extend the legal maturity date of the loan by more than six months.
A refinance for this purpose does not include:
(a) A re-aging, defined as returning a delinquent, open-end account to current status without collecting the total amount of principal, interest, and fees that are contractually due, provided:
(i) The re-aging is part of a program that, at a minimum, adheres to the re-aging guidelines recommended in the interagency approved Uniform Retail Credit Classification and Account Management Policy; [12]
(ii) The program has clearly defined policy guidelines and parameters for re-aging, as well as internal methods of ensuring the reasonableness of those guidelines and monitoring their effectiveness; and
(iii) The bank monitors both the number and dollar amount of re-aged accounts, collects and analyzes data to assess the performance of re-aged accounts, and determines the effect of re-aging practices on past due ratios;
(b) Modifications to a loan that would otherwise meet this definition of refinance, but result in the classification of a loan as a TDR or modification to borrowers experiencing financial difficulty;
(c) Any modification made to a consumer loan pursuant to a government program, such as the Home Affordable Modification Program or the Home Affordable Refinance Program;
(d) Deferrals under the Servicemembers Civil Relief Act;
(e) A contractual deferral of payments or change in interest rate that is consistent with the terms of the original loan agreement (e.g., as allowed in some student loans);
(f) Except as provided above, a modification or series of modifications to a closed-end consumer loan;
(g) An advance of funds, an increase in the line of credit, or a change in the interest rate that is consistent with the terms of the loan agreement for an open-end or revolving line of credit (e.g., credit cards or home equity lines of credit);
(h) For credit card loans:
(i) Replacing an existing card because the original is expiring, for security reasons, or because of a new technology or a new system;
(ii) Reissuing a credit card that has been temporarily suspended (as opposed to closed);
(iii) Temporarily increasing the line of credit;
(iv) Providing access to additional credit when a bank has internally approved a higher credit line than it has made available to the customer; or
(v) Changing the interest rate of a credit card line when mandated by law (such as in the case of the Credit CARD Act).
*****
[12] Among other things, for a loan to be considered for re-aging, the following must be true: (1) The borrower must have demonstrated a renewed willingness and ability to repay the loan; (2) the loan must have existed for at least nine months; and (3) the borrower must have made at least three consecutive minimum monthly payments or the equivalent cumulative amount.
*****
By order of the Board of Directors.
Dated at
Assistant Executive Secretary.
[FR Doc. 2022-22986 Filed 10-20-22;
BILLING CODE 6714-01-P
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