One key step in determining if the modification is a TDR is to look at the borrower and its financial situation. Is the borrower experiencing financial difficulty? Has its creditworthiness deteriorated since the loan was made or acquired? Is the borrower currently in default on this or other debt? Is the borrower in bankruptcy? If the answer to these questions is yes, then the modification may be considered a TDR. Another step considers the lender's perspective. Is the lender granting concessions that the borrower otherwise would not be able to get in the open market? Is the effective interest rate close to a market rate, given the risk characteristics of this loan? Essentially, would the lender make this loan if it were a new loan? If the lender is veering too far from where it would normally lend, then this should be considered a TDR. While there is still a fair amount of judgment at play, the facts may align themselves strongly in one direction when determining if a modification is a TDR. As always, all parties involved will want to take a thoughtful approach to any valuation considerations.

If the modification is classified as a TDR, the lender must determine impairment on an individual loan basis, rather than at the collective level appropriate for modifications. This clearly means more work and more controls.

Classifying a loan modification as a TDR could increase disclosures and affect credit loss allowances. The guidance will have the biggest impact on banks and other financial institutions, since they will need to update their systems, improve internal controls and obtain more information on the individual loans and underlying assets. In the end, this process could result in new opportunities for investors.

First, lenders may be less willing to make the modifications that they have made in the past. Not wanting to have more loans classified as TDRs, lenders may now have less incentive to extend and pretend. At times, this could push borrowers into situations where they are unable to obtain new financing or modify their existing loans and, as a result, must sell the underlying assets. Or the borrower may seek higher interest debt financing or a revised capital structure to get it through the difficult time.

Second, lenders may see a spike in TDRs. Again, not wanting too many TDRs may mean that lenders will be more likely to sell some loans, creating opportunities for investors in the space. As the TDRs increase, so do the lender's workload and disclosures, possibly increasing the lender's appetite for a note sale. At times accounting and regulatory changes can be viewed as a burden or a necessary evil, but they can also bring about opportunities for those looking. As with any change, time will tell the extent of any impact. If nothing else, greater clarity and improved transparency are good things.

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