The largest U.S. banks may be less likely to work with customers experiencing financial difficulty through loan modifications under a recent proposed rule from the Federal Deposit Insurance Corp.
A July 20 notice of proposed rulemaking from the FDIC would require banks with $10 billion or more in assets to begin using "modifications to borrowers experiencing financial difficulty" in calculations for their Deposit Insurance Fund assessment rates. The language would replace troubled debt restructurings, or TDRs, in the underperforming assets ratio and higher-risk assets ratio in the scorecards for large and highly complex banks.
While the industry applauded the exclusion of TDRs from the calculation, it is calling on the FDIC to either leave loan modifications for financially troubled borrowers out of large banks' calculations for deposit insurance assessments, or limit the way in which those modifications must be used. In its current form, the FDIC's proposal could lead to higher deposit insurance assessments for banks and fewer options for borrowers seeking loan modifications as banks may feel discouraged from working with customers experiencing financial difficulty in order to avoid those higher assessments, the industry argued.
"It could be a material number for a really large number of institutions," Cliff Stanford, partner and head of the bank regulatory practice at Alston & Bird, said in an interview. "This is something they should be factoring into calculations for next year."
Banks have billions in restructured loans
Banks had billions in restructured loans as of June 30, according to data from S&P Global Market Intelligence.
Wells Fargo & Co. topped the list with $3.94 billion in restructured loans, and Bank of America Corp. followed with $3.84 billion in restructured loans at the end of the second quarter. JPMorgan Chase & Co., the largest U.S. bank by total assets, had $3.59 billion in restructured loans at June 30. All three banks posted quarter-over-quarter and year-over-year declines in that loan category.
Banks with the highest proportion of restructured loans
The two banks with the highest proportion of restructured loans are both based in Puerto Rico.
Banco Popular de Puerto Rico topped the list with $1.16 billion in restructured loans, or 5.45% of total loans and leases in the second quarter. Next was FirstBank Puerto Rico, with $370.6 million in restructured loans, or 3.30% of total loans at June 30.
The industry reacts
In a comment letter to the FDIC, Bank of America said it supports removing TDRs from deposit insurance calculations entirely, but the company opposes including data on modifications to borrowers experiencing financial difficulty.
Including such data could invite "the unintended consequence of discouraging lenders from actively offering modifications to avoid the additional FDIC assessment," Bank of America Corporate Controller Michael Tovey wrote in the letter.
However, if the agency goes ahead with requiring the inclusion of loan modification data in assessment calculations, it should limit the data to modifications over the prior 12 months from the reporting date of the assessment because borrowers' financial difficulties are often temporary, Tovey wrote.
Under the proposed rule, banks working with customers through modifications would be penalized through higher assessments, banking trade groups argued.
"The volume of modifications does not provide a fair relative measure of loan quality between different banks," the American Bankers Association and Bank Policy Institute wrote in their comment letter to the FDIC. "A troubling effect of replacing TDRs with [modifications] would be to impose higher assessments on banks that actively work with customers through loan modifications."
The Independent Community Bankers of America also opposed including loan modifications in the calculations, arguing that modifications are "a gray area" that remains a new concept in the accounting world, James Kendrick, first vice president of accounting and capital policy at the Independent Community Bankers of America, said in an interview.