Commentary On NCUA's January 26 Proposed Rule on TDRs

A summary of key provisions of the proposed action with commentary on what the rule will mean for credit unions.

 
 

Troubled-debt restructure (TDR) accounting rules and related regulatory reporting requirements have been a source of confusion to credit unions for the past several years. On January 26, 2012, the NCUA Board proposed new rules to create a more logical approach to and greater uniformity of TDR reporting.

The following table includes summaries of NCUA’s proposed preliminary actions accompanied with my comments and observations as to what the actions will mean for credit unions. Their full proposal can be downloaded here.

Proposed NCUA Provision Mike Sacher’s Comments/Observations
Allow credit unions to calculate delinquency on TDR loans consistently with loan contract terms, including amendments made to loan terms by a formal restructure.
  • Excellent move by NCUA. This will eliminate the confusion surrounding the reporting of delinquency status on consumer TDR’s. Apparently, this will eliminate the need to track (usually by intensive manual processes) whether the borrower made six consecutive payments before the credit union removed the TDR from the delinquency list.
  • This will also result in a potentially significant reduction in the amount of reported delinquency for credit unions that have been approving TDR loans.
The NCUA Board proposes to further revise the regulatory reporting requirements by eliminating data collection on modified loans and targeting data collection efforts to loans meeting the definition of a TDR under Generally Accepted Accounting Principles (GAAP).
  • Excellent move by NCUA. This will eliminate a lot of confusion and simplify completion of the 5300 Call Report.
  • NCUA appropriately points out the Financial Accounting Standards Board (FASB) recently clarified numerous issues related to TDR accounting, and many loan modifications meet the definition of a TDR.
NCUA acknowledges that entering into loan modification agreements is often a prudent course of action. It then discusses safety and soundness concerns that lead to the requirement for each federally insured credit union (FICU) to have a written loan workout policy and associated monitoring and controls. This discussion formalizes the existing practice of nonaccrual standards for past due loans. NCUA enumerates numerous policy requirements in the proposed rule.
  • NCUA has expressed appropriate concerns that all credit unions should address, both as a matter of written policy and practice.
  • However, some of the proposed requirements appear excessive. Credit unions should review the proposed rule and provide feedback to NCUA during the 30-day comment period.
Credit unions are to cease accruing interest on loans at 90 days or more past due.
  • The majority of credit unions already comply with this rule. Credit unions and NCUA should take care to ensure written policy is consistent with this rule.
Credit unions are to maintain member business workout loans on nonaccrual status until the credit union receives six consecutive payments under the modified terms.
  • Presumably NCUA is referring to TDR loans. NCUA should be more consistent in its terminology.
  • It is not clear why NCUA is proposing a different treatment for MBLs versus consumer loans. NCUA should require the same 90-day timeframe to MBLs as it is proposing for consumer loans.
  • NCUA should define what constitutes a “consecutive payment.” If a credit union receives payment after the due date, would these constitute as consecutive payments?
  • I recommend each credit union define, in written policy, the maximum timeframe in which a received payment would still be considered a successful consecutive payment. For example, the credit union considers any payment received within 30 days of the due date effective for purposes of the six consecutive payment rule.
The proposal requires a formally restructured member business loan workout to remain in nonaccrual status until the credit union can document a current credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. The valuation must consider the borrower's sustained historical repayment performance for a reasonable period prior to the date on which the loan is returned to accrual status.
  • Again, NCUA seems to be holding MBLs to a higher standard compared to consumer loans.
  • It appears NCUA might be distinguishing between a TDR loan versus a restructured loan. NCUA should be consistent in terminology.
The loan workout policy should also include aggregate program limits (for total workout portfolio and each type of workout) as a percentage of net worth.
  • NCUA should rethink this requirement. During highly stressed economic cycles, credit unions might accumulate TDR portfolios significantly exceeding concentration policy guidelines. Such policy guidelines should NOT result in denying modifications that otherwise make good economic sense.

 

 

 

 

Jan. 27, 2012


Comments

 
 
 
  • Great analysis as aways. Thanks Mike!
    alan althouse
     
     
     
  • Thank Mike.

    Couple of questions:

    Is NCUA creating a departure from GAAP on consumer loans determined to be TDR? If so, this would add to the Pooling vs. Purchase departure and another step toward RAP (Regulatory Accounting Principles) vs GAAP like we had in the 1980's.

    How will this impact acquiring loan portfolios in an acquisition? Impaired loans treatment for MBL's only or all loans of a troubled CU in an acquisition?
    Mike Radliff
     
     
     
  • I heard NCUA finalized this yesterday but haven't been able to locate a published version of the final rule.
    Kevin Zimmer