How To Interpret The New Regulation On Troubled Debt Restructurings

With the right approach, credit unions can uncover increased benefit from these amended guidelines.

 
Bryan W. Mogensen

By CliftonLarsonAllen, LLP

 

With all of the extensive changes in regulatory compliance, it sure is nice when a regulation is passed that actually lessens the credit union industry’s compliance and reporting burdens.

Back in May 2012, the National Credit Union Administration (NCUA) issued 12 CFR Part 741; Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured (TDR) Loans. Under this regulation, credit unions were required to develop comprehensive written loan workout and accrual policies and procedures.

This rule was later amended to further facilitate credit unions working with and serving members who have experienced financial difficulties over the past several years. Many credit unions have been offering sensible workout loans and, as a result, the number of these loans has significantly increased. The rule also aligned the credit union industry with the provisions established by the Federal Financial Institutions Examination Council (FFIEC), which differed from those required by NCUA.

The key provisions — which should have already been established and implemented by all federally-insured credit unions — are summarized as follows:

DATE CHANGES
6/30/12 Regulatory reporting of workout loans, including TDR past due status
10/1/12 Written loan workout policy and monitoring requirements
10/1/12 Written loan nonaccrual policy
12/31/12 Nonaccrual status and restoration to accrual status program

Regulatory Reporting

Under the new rules, the past due status on all TDRs must be consistent with the loan’s contract terms, including any and all amendments (i.e., restructurings). In return, the dual delinquency tracking burden has been eliminated and changes have been applied to the past due reporting, including no more re-aging based on the original contract terms. Furthermore, the Call Report update from June 2012 eliminated the broad category of “modified loans” and now focuses on TDRs — which were implemented in the December 2012 Call Report.

This is a welcome change to the industry, as loan delinquency is now based on a true past due status reporting which is also in line with bank reporting. As a result, credit unions can be compared to banks using similar past due reporting standards. These changes also create enhanced efficiency, as management does not have to separately track TDR loans for delinquent loan reporting.

Written Loan Workout Policy

Credit union’s written loan workout policy should, at a minimum, address the following items in order to be in compliance:

  • Loan workout eligibility
  • Limitations on the number of times a loan can be modified
  • Documentation of renewed member willingness and ability to repay

Credit unions should also establish controls so their workouts are appropriately structured and consistently applied, are commensurate with the size or complexity of the credit union, and are consistent with broader risk mitigation strategies. One key provision in the new regulations that is commonly missed prohibits advances to finance unpaid interest, fees, and commissions.

However, credit unions can cover insurance and property taxes. Finally, all restructured loans, including TDRs and other workouts, must be monitored by the credit union’s board.

Besides developing the written loan workout policy, financial cooperatives should also consider incorporating concentration risk into their policy concerning TDRs as a percentage of net worth, total loans, etc. They may also want to include a detailed loan modification worksheet, which can help the management team analyze and document its decision to grant the loan modification.

Written Loan Nonaccrual Policy

In practice, credit unions have always stopped the accrual of interest when a loan is past due for 90 days or more. However, with one exception — i.e., a delinquent loan can be placed back on full accrual status when it is “well secured” and “in process of collection” — credit unions are now required to establish a written policy.

This written policy can be very brief and incorporated into any other policy, including loan, collection, allowance for loan losses, or accounting policies.

Nonaccrual Status

The new rules, which in general are in compliance with generally accepted accounting principles (GAAP), state that a credit union can restore a loan to full accrual status when:

  • The past due status is less than 90 days in default and the credit union is plausibly assured of repayment.
  • A loan is well secured and in the process of collection.

One provision that is commonly missed is that for member business loans, credit unions can only bring the loan back to full accrual status when the member has a sustained period of repayment (i.e., six months of consecutive payments) under the revised terms, with a look back provision.

Be Prepared For Your Exam

During your next scheduled exam, your NCUA examiner will review your written loan workout and accrual policies and procedures. If you need any assistance in reviewing policies before your next exam, please feel free to contact CliftonLarsonAllen.

Bryan W. Mogensen, CPA, is a Financial Institutions Assurance Partner with CliftonLarsonAllen LLP. He can be reached at bryan.mogensen@CLAconnect.com or 602-604-3551.

About CliftonLarsonAllen’s 3,600 people are dedicated to helping businesses, governments, nonprofits, and the individuals who own and lead them. From offices coast to coast, our professionals practice in specific industries to deliver audit, tax, consulting, and outsourcing capabilities best aligned with our clients’ needs. Integrated wealth advisory services address their personal financial goals, and our international resources help organizations successfully enter and compete in all markets, foreign and domestic. For more information, visit CLAconnect.com. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC.

 

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Nov. 1, 2013


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