Troubled Debt Restructuring
A Regulator’s Perspective
Presenters
 Jane
Johnson, Financial Examiner Supervisor, Division
of Credit Unions, Department of Financial Institutions
 Elizabeth Habring, Supervisory Examiner,
Region V, National Credit Union Administration
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
‘What is a TDR?’

Troubled Debt Restructuring results when the
lender grants concessions, that would not
ordinarily be granted, to the member in light of
the members' financial difficulties.

Concessions often involve a reduced interest rate,
payment or principal amount.

Routine changes in debt terms and loan deferrals
are not considered troubled debt restructurings
unless they are granted due to the adverse
financial condition of the member.
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Concessions Include
Reduction of the contractual (stated)
interest rate
 Extension of the maturity date
 Suspension of contractual payments
 Reduction of the face amount of debt,
i.e., forgiveness of a portion of principal
 Reduction (forgiveness) of accrued
interest
 Reduction (forgiveness) of fees

‘Are TDRs a “bad” thing?’
 Not
trying to discourage
 TDR
is an expected part of a credit
union’s management of assets
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
GAAP is set forth in the FASB

CPA firms consider materiality.

From a regulatory perspective,
materiality is not the only issue.

SFAS 15

SFAS 114

SFAS No. 5

EITF 02-4
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
‘What about refinances?’

When a borrower refinances or
restructures a loan, and the terms are
at least as favorable to the lender as
the terms for comparable loans to
other members with similar collection
risks who are not refinancing or
restructuring, the refinanced loan
should be accounted for as a new
loan.
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Example of TDR & Refinance

Current used auto loan rate is 5%.

TDR: Joe has a 7% used auto loan
(pymt $346, 12 month term). Credit
Union agrees to accept 3% interest,
(pymt $172, 24 month term).

Refinance: Sue has a 7% used auto loan
(pymt $346, 12 month term). Credit
union agrees to accept 5% interest
(pymt $342, 12 month term).
‘How is a TDR reported?’
 Vast
majority of TDR are
immaterial for balance sheet
purposes
 BUT:
TDRs must be reported on
5300 Call Report
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
5300
 Page
9 “Delinquent Loans” by
Collateral Type, lines 1 thru 15
 Report TDRs as delinquent with
original loan contract terms until
the borrower is current with the
new terms for 6 months
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Example: Report of Consumer Loan TDR
Original loan requires monthly payments of $400 at an
interest rate of 6% with 9 months left in term of an
unsecured loan. The credit union agreed to accept
monthly payments of $275 at 10% for 12 months.
Month
Payment
Status
Feb
$300
Delinquent (60 days)
Mar
$275
Delinquent (90 days)
Apr
$275
Rewrote to new terms (TDR)
May
$275
June
$275
July
$275
August
$275
September
$275
Report loan as delinquent on 5300
Delinquent (180 days)
Report loan as current on 5300.
5300 (continued)
 Page
15 “Specialized Lending”
Section 2 RE Loans, Line 14
 RE loans whose terms have been
modified due to the inability of the
borrower to meet the original
terms of the note
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Accrual

For regulatory reporting purposes
TDR loans may not be returned to full
accrual status until the six-month
consecutive payment requirement is
met.
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
‘Won’t that increase my
delinquency ratio?’
 Yes
 Increases
are expected especially
in this market
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
‘But what if I’m not losing any
money?’
A loan is “impaired” when, based on
current information and events, it is
probable that an institution will be
unable to collect all amounts due
according to the contractual terms of
the loan agreement.
 Therefore, impairment is measured
using an estimate of the expected
future cash flows (NPV).

Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
NPV
 For
the majority of TDR loans we
see in Credit Unions, there is a loss
but it is immaterial for balance
sheet purposes.
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Why do we need to report
this?
Regulators (and credit union
management) look to the
delinquent loan reporting to
provide insight into the quality of
the loan portfolio.
 Your internal management
assessment

Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Internal Management
Assessment
Top management and the Board
should be aware of the level of
restructuring
 TDR is a useful and effective way to
manage troubled assets and should be
considered in any workout /
foreclosure / repo decision
 By keeping track of the TDRs being
done, management can ensure that
TDRs are being used as planned

Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Example of Analysis




Loan: car loan of $30,000, 6%, 36 months, Pymt =
$913
After the Member makes the 12th monthly payment
they tell you their spouse lost their job and they can’t
afford the car anymore – they are thinking of turning
in the car to you
Blue Book says that in today’s market the Credit
Union would sustain at least an $8,000 loss if you
repo’d it
The Member says he could afford a monthly pymt of
$750 but only for 2 years
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
What do you do?
 Repo
the car and take the $8K
loss?
 TDR and lower the payment to
$750 for next 24 months?
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
TDR is More Beneficial to CU





The amount of impairment on the restructured
loan (i.e., the FAS 114 allowance) is the excess of
the recorded investment in loan over the present
value of expected future cash flows
=PV(rate,months,pymt)
=PV((6%/12),24,750)=$16,922
Loan balance at time of modification
= $20,592
Difference (Loss) = $3,370
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
What’s the bottom line?
 If
a new member walks in your
door today, would you make a
new loan at the workout rate and
terms? If not, it’s a TDR.
 To
leave delinquent loan status,
the TDR must perform for 6
months under the new (re-written)
contract terms.
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
References
 NCUA
Accounting Bulletin 06-01
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
How to Contact Us

Contact Us:

Jane Johnson
Financial Examiner Supervisor of DCU
jjohnson@dfi.wa.gov

360.902.0508
Elizabeth A. Habring
Supervisory Examiner – Region V
National Credit Union Administration
ehabring@ncua.gov
800.827.6282 ext 3548
Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”