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We have a small number of three-year adjustable rate mortgage (ARM) loans held in portfolio. We would like to modify them to expand the fixed rate term to five years. If borrowers sign modification agreements to make the change, would that be considered a troubled debt restructuring for GAAP purposes? – IBA Compliance Connection

IBA Compliance Connection

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We have a small number of three-year adjustable rate mortgage (ARM) loans held in portfolio. We would like to modify them to expand the fixed rate term to five years. If borrowers sign modification agreements to make the change, would that be considered a troubled debt restructuring for GAAP purposes?

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We are unable to determine whether this modification would be considered troubled debt restructuring under generally accepted accounting principles (GAAP) based on the information provided.  

For a debt restructuring to qualify as a “troubled debt restructuring,” GAAP requires that the creditor grant a concession to the borrower that it would not otherwise consider, for “economic or legal reasons related to the debtor’s financial difficulties.”

In this case, you have not indicated the modification is a concession that you would not otherwise consider. Even if the changes are a concession on your part, you still must make a separate assessment to determine whether the debtor is experiencing financial difficulties, which you have not stated has been performed here.

For resources related to our guidance, please see:

  • Financial Accounting Standards Board, Accounting Standards Update, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, pg. 1 (April 2011) (“In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: 1. The restructuring constitutes a concession. 2. The debtor is experiencing financial difficulties.”)

  • 2017 GAAP Guide Vol. 1, Restatement and Analysis of Current FASP Standards, pp. 18-010–18-028.