The Massachusetts Division of Banks (“Division”) released guidance on December 27, 2012 (the “Division Guidance”) to clarify the Division’s position on the treatment of a loan modification for a residential borrower whose loan balance exceeds the value of the property securing his or her loan but who is not delinquent in his or her loan payments. In such a circumstance, that credit may not necessarily have to be classified as a troubled debt restructuring (“TDR”).
A TDR exists when a lender restructures or modifies a loan for economic or legal reasons where the lender grants a concession that it would otherwise not consider but for the borrower’s financial difficulties.
Massachusetts General Laws Chapter 183 Section 63A provides that, at the request of a borrower, a lender may revise the rate of interest, change an adjustable or variable rate to a fixed rate, extend the term of a mortgage or change the amount of the periodic payments of principal or interest, or both, of an existing note and mortgage that it holds on a one-to-four family, owner occupied residence, subject to certain restrictions. The statute, however, does not govern how such a restructuring should be categorized from an accounting perspective. Guidance from the Accounting Standards Codification (“ASC”) Subtopic 310-40 and an update by the Financial Accounting Standards Board (“FASB”) Accounting Standards Update ASU 2011-02 is available to help determine such categorization.
The Division Guidance indicates that, so long as the borrower is not experiencing financial difficulties and is performing under his or her loan, the fact that the loan is underwater does not by itself constitute a TDR. All facts and circumstances must be considered by the lender to determine whether the borrower is in financial difficulty and whether the lender is granting a concession.
The Division Guidance also reminds all lenders that they should have policies and procedures in place to document all modifications in a consistent manner.