ABA, BPI oppose proposed replacement for troubled debt restructuring

In comments filed with the FDIC Friday, the American Bankers Association and Bank Policy Institute came out against an agency proposal to replace troubled debt restructuring in assessments scorecards for large banks with a new term, “modifications to borrowers experiencing financial difficulty.” Seeing no suitable replacements for TDRs, the groups recommended they instead be removed without replacement.

The FDIC in July issued a proposed rule for banks with at least $10 billion in assets that would make two changes: replace TDRs with MBEFD in the underperforming assets ratio, and change the criterion for refinance of a consumer or commercial loan that classifies the loan as “higher-risk” based on whether the refinance is a MBEFD. In their letter, ABA and BPI said MBEFD can vary dramatically between institutions, as it is a direct function of how the individual bank executes loss mitigation efforts. Replacing TDRs with MBEFD would impose higher assessments on banks that actively work with customers through loan modifications, they said.

The FDIC proposal raised the possibility of eliminating TDRs completely, which ABA and BPI noted would apply to all banks uniformly, unlike the MBEFD proposal. The groups urged the agency to consider elimination of TDRs or, short of that, to extend the comment period to allow large banks to better understand how MBEFD will be reported in the agency’s Call Report.