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Credit unions should know how to comply with the new regulation requiring them to develop comprehensive written loan workout and accrual policies and procedures.

How to Interpret the New Credit Union Regulation on Troubled Debt Restructurings

  • 1/18/2013

How to Interpret the New Credit Union Regulation on Troubled Debt Restructurings

by Bryan Mogensen

With all of today’s extensive regulatory compliance, it sure is nice when a regulation is passed that actually lessens our compliance and reporting burdens.

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 the new regulation, credit unions must develop comprehensive written loan workout and accrual policies and procedures.

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

The key provisions — which should have already been established 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 amendments. This has eliminated the dual delinquency tracking burden and changed 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 — this was implemented in the December 2012 Call Report.

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

Written loan workout policy

Ensure your credit union’s written loan workout policy is in compliance by addressing:

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

You should also establish controls so your workouts are appropriately structured, applied consistently, commensurate with the size or complexity of your credit union, and are consistent with broader risk mitigation strategies. One key provision that is commonly missed prohibits advances to finance unpaid interest, fees, and commissions. However, it can cover insurance and property taxes. Finally, all workouts should be monitored by your credit union’s board.

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

Written loan nonaccrual policy

In practice, credit unions have always been stopping accrual of interest when a loan is past due for 90 days or more; however, you are now required to establish a written policy. There is one exception — a delinquent loan can be placed back on full accrual status when a loan is “well secured” and “in process of collection.”

This written policy can be very brief and incorporated into any other policy, including your 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 you are plausibly assured of repayment
  • A loan is well secured and in process of collection

One provision that is commonly missed is that for member business loans you 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 your policies before your next exam, please feel free to contact CliftonLarsonAllen.

Bryan Mogensen, Financial Institutions Assurance Partner or 602-604-3551