Loan Workouts,
Nonaccrual Policy
&
Reporting TDRs
Presented By
Daniel R. Loritz, Esq.
OKUN LORITZ, LLP
NCUA Final Rule
Issued: May 31, 2012
Applies to All Federally-Insured CUs
Part I:
Loan Workout Policies
NCUA Rules & Regulations Part 741.3
★
The Final Rule revises NCUA Rules & Regulations
Section 741.3:
“In determining the insurability of a credit union . . . , the following criteria shall be
applied:
(b)
both
Financial condition and policies. The following factors are to be considered in
determining whether the credit union’s financial condition and policies are
safe and sound:
(2)
member
The existence of written lending policies, including . . . loan
workout arrangements, and nonaccrual standards that include the
discontinuance of interest accrual on loans past due by 90 days or
more and requirements for returning such loans, including
business loans, to accrual status.”
NCUA Rules & Regulations Part 741.3
★
What Does it Mean?
Your Credit Union must:
1.
Adopt policies that govern loan workouts and nonaccrual practices.
2.
Your written nonaccrual standards must include the discontinuance of interest
accrual when the loan is past due by 90 days or more.
Current widespread industry practice?
3.
Your written policies must address requirements for returning loans to “accrual”
status.
NCUA Rules & Regulations Part 741.3
★
Appendix C to the Final Rule Adds an Interpretive Ruling and Policy Statement
(IRPS)

Addresses loan workout account management and reporting standards.

Explains how credit unions should report TDR data on Call Reports.
Very important to discuss this with your CFO and/or CPA firm.
Written Loan Workout Policy
★
Why Does the NCUA Care?
The lack of an appropriate, written Loan Workout Policy can mask the true
performance and past due status of a loan portfolio.
★
What Do You Have to Do?
1.
The Credit Union’s Board must adopt a written Loan Workout Policy by October
2012;
2.
Establish controls to ensure that the Policy is consistently applied;
3.
The Loan Workout Policy should be commensurate with your Credit Union’s size
and complexity; and
4.
Must be “in line with” the Credit Union’s broader risk-mitigation strategy.
1,
Written Loan Workout Policy
★
What Must the Policy Address?
1.
Define eligibility requirements;
Under what circumstances will the Credit Union consider a loan workout?
2.
twice
that the
Establish limits on the number of times an individual loan may be modified;
Note that if the Credit Union restructures a loan more than once per year or
in 5 years, the NCUA will impose strict requirements for documenting
borrower has a renewed willingness and ability to repay.
One way to provide this additional documentation is to perform validations on
completed restructurings that have improved collectability. When the NCUA
asks, you can show them that you have restructured similar loans and that you
have been successful.
State Chartered CUs: See California Code of Regulations Part 30.401 and
30.801.
Written Loan Workout Policy
★
California Code of Regulations Part 30.401(a)
“(a) Obligations shall not be extended, refinanced, renegotiated, or revised unless
there is evidence that the borrower will be able to adhere to the terms of the
extended, refinanced, renegotiated, or revised obligation.”
Written Loan Workout Policy
★
California Code of Regulations Part 30.801
“(a) A loan officer . . . may:
(1)
Extend a close-ended obligation, provided, however, a close-ended
obligation shall not be extended more than twice (2x) during the
term of the obligation, and any one extension may not be for more
than two consecutive contractual payments.
(2)
Defer contractual payments due with respect to open-ended
obligations, provided that contractual payments with respect to any
open-ended obligation shall not be deferred more than once (1x)
during any twelve (12) month period.
(b)
Any extension or deferral in excess of the limitations specified in this
Section shall be approved by the board of directors, the credit committee
or the credit manager.
Written Loan Workout Policy
★
What Must the Policy Address (Continued)?
3.
The Policy must ensure that your Credit Union makes loan workout decisions
based on the borrower’s renewed willingness and ability to repay the loan;
4.
The Policy should include controls to ensure that loan workouts are appropriately
structured; and
For example: Your Policy could include a listing of various methods and
combination of methods that are acceptable when restructuring a loan.
5.
The Policy must provide that in no event will the Credit Union authorize
additional advances to finance unpaid interest and Credit Union fees. However,
the Credit Union may make advances to cover 3rd party fees (excluding Credit
Union commissions), such as force-placed insurance and property tax payments.
Written Loan Workout Policy
★
What Are the Documentation Requirements?
The Credit Union must have documentation that substantiates its determination
that the borrower is willing and able to repay the loan.
Written Loan Workout Policy
★
What Should Management Do?
1.
Management must ensure that comprehensive and effective risk management and
internal controls are established and maintained:
a.
So that loan workouts can be adequately controlled and monitored by
of Directors and management;
b.
To provide for timely recognition of losses; and
c.
To permit review by examiners.
the Board
2.
The Credit Union’s risk management framework should include thresholds based
on total loan workout activity that trigger enhanced reporting to the Board of
Directors.
Written Loan Workout Policy
★
What Should the Board of Directors Do?
1.
2.
The Board of Directors must evaluate the effectiveness of:
a.
The Credit Union’s loan workout program; and
b.
Any implications to the Credit Union’s overall financial condition.
Make any compensating adjustments to the overall business strategy.
Written Loan Workout Policy
★
Management Information Systems
To be effective, management information systems must:
1.
Track the principal reductions and charge-off history of loans in workout
programs by type of program;
2.
Support any decision to re-age, extend, defer, renew, or rewrite a loan; and
3.
Be able to identify and document any loan that is re-aged, extended, deferred,
renewed, or rewritten, including the frequency and extent of such action.

The required documentation should show (at a minimum):
a.
That the Credit Union’s personnel communicated with the
b.
The borrower agreed to pay the loan in full under any new
has the ability to do so.
borrower; and
terms and
Written Loan Workout Policy
★
What Resources are Available to Help Draft your Policy?
1.
The FFIEC’s “Uniform Retail Credit Classification and Account Management
Policy” 65 FR 36903 (June 12, 2000);
Sets forth specific limitations on the number of times a loan can be re-aged (for
open-end accounts) or extended, deferred, renewed, or re-written (for closed-end
loans).
2.
NCUA Letter to Credit Unions 09-CU-19: “Evaluating Residential Real Estate
Mortgage Loan Modification Programs.”
Outlines policy requirements for real estate modifications, but could be adapted
by your Credit Union for use in its Loan Workout Policy.
3.
Call or email me.
(818) 956-8052 or Dan@OkunLoritz.com
Part II:
Reporting of Workout Loans
Definitions
★
★
What is a Workout Loan?
1.
A loan to a borrower in financial difficulty;
2.
That has been formally restructured;
3.
So as to be reasonably assured of repayment (of principal and interest) and of
performance according to the restructured terms.
Examples
1.
Re-aging;
4.
Renewals; or
2.
Extensions;
5.
Rewrites
3.
Deferrals;
Definitions
★
What is a TDR?
A “troubled debt restructuring” is as defined in GAAP and means:
1.
A restructuring in which a credit union;
2. For economic or legal reasons related to a member borrower’s financial
difficulties;
3.
Grants a concession to the borrower that it would not otherwise consider.
Definitions
★
When is a Loan Workout NOT a TDR?
Example: When the Credit Union accepts cash and/or other assets in full satisfaction
of the debt in an amount that is at least equal to the unpaid balance of the loan less any
amounts previously charged-off.
This is not a TDR because the Credit Union is getting the full unpaid balance of the
loan (after charge-off), which means that the Credit Union is not granting a concession
that it would otherwise not consider.
Nonaccrual Policy
★
What is Changing?
1.
Calculating Past Due Status: As of July 2, 2012, all federally-insured credit
unions must calculate past due status of workout loans consistent with the loan
contract (as modified).
2.
June Call Reports: Data collection for the Call Report for the quarter ending
June 30, 2012 must reflect the revised calculation requirements for TDR loans
(see above).
3.
the Call
Report in
December Call Reports: For the quarter ending December 31, 2012,
Report will be revised with new instructions on how to complete the
accordance with the new IRPS on reporting TDRs.
In order for credit unions to file the data related to loans placed in “nonaccrual”
status in accordance with the Final Rule and the IRPS, they must have
written
nonaccrual policies and loan workout policies in effect at
the beginning of the
quarter. Therefore, these policies must be in
place no later than October 1, 2012.
Nonaccrual Policy
★
Accounting Treatment - What Do You Have to Do?
When a loan is in default, you must do the following to ensure appropriate income
recognition:
1.
Place loans in “nonaccrual” status when the loan is 90 or more days past due;
Important Note: This does not mean that your Credit Union cannot collect
interest
payments in accordance with the loan contract (as modified). The
collection of
payments is different from the accounting treatment.
2.
Reverse or charge-off previously accrued but uncollected interest;
3.
Comply with the criteria under GAAP for Cash or Cost Recovery basis of income
recognition;
Nonaccrual Policy
★
Accounting Treatment - What Do You Have to Do (Continued)?
4.
Report TDRs on the new Call Reports; and
5.
Follow the specifications in the IRPS for restoration of a “nonaccrual” loan to
“accrual” status.
Reporting TDRs
★
Reporting TDRs on Call Reports
1.
Credit Unions must report delinquencies on Call Reports consistent with the
requirements set forth in the IRPS.
2.
For the December 31, 2012 Call Report, the NCUA will provide instructions,
addressing the requirement to focus data collection on loans meeting the
definition of TDR under GAAP.
Restoration to “Accrual” Status
★
For All Loans Except MBLs
A “nonaccrual” loan may be restored to “accrual” status when:
1.
a.
Its past due status is less than 90 days;
b.
GAAP does not require the loan to be maintained on the Cash or Cost
Recovery Basis; and
c.
The Credit Union is plausibly assured of repayment of the remaining
contractual principal and interest within a reasonable
period;
2.
When the loan otherwise becomes both “well secured” and “in the process of
collection;” OR
3.
The asset is a “purchased impaired loan” and it meets the criteria under GAAP
Definitions
As noted above, you can restore a “nonaccrual” loan to “accrual” status if it is both “well
secured” and “in the process of collection.”
“Well secured” means:
1.
Collateralized by a perfected security interest in an amount sufficient to cover the loan
balance (less unpaid amounts, amounts charged-off, and recorded accrued interest)
plus a reasonable return on that amount; OR
2.
By a guarantee of a financially responsible party.
“In the Process of Collection” means:
Collection is proceeding in due course through either:
1.
Legal Action;
2.
Other collection efforts expected to result in repayment of the debt or restoration to
current status within 90 days.
Restoration to “Accrual” Status
★
For MBLs
1. A formally restructured member business loan workout may be restored to
“accrual” status when:
a.
The restructuring and any charge-off taken on the loan are supported
by
a current, well-documented credit evaluation of the
borrower’s financial
condition and prospects for
repayment under the revised terms; and
b.
the
2.
The borrower has made a minimum of 6 consecutive payments under
restructured terms.
Otherwise, the restructured loan must remain on “nonaccrual” status.
Restoration to “Accrual” Status
★
For MBLs
Example:
Original loan payment = $1,500. Restructured to reduce payment to $1,000.
Pre-Workout
Month 1
$1,500
Post-Workout
Month 2 . . .Month 5 Month 6
$950
# of Consecutive Pmts:
4
5
$1,000
$1,000
1
Month 7
Month 8
Month 9
Month 10
$1,000
$1,000
$1,000
$1,000
2
3
6
Given the above, the loan would remain in “nonaccrual” status until the 5th post-workout payment is
received in month 10). Note: The restructuring and any charge-off taken on the loan must also be
supported by a current, well-documented credit evaluation of the borrower’s financial condition and
prospects for repayment under the revised terms.
Summary
1.
Adopt a written Loan Workout and Nonaccrual Policy by October 1, 2012.
2.
Report delinquencies on the Call Report for the quarter ending on June 30, 2012 by
calculating the past due status based on the contract terms, including any modifications.
3.
Report TDRs on the new Call Report in accordance with the IRPS (see Appendix C to
the Final Rule) and instructions to be given by the NCUA for Call Reports beginning
with the Call Report for the quarter ending December 31, 2012.
4.
If necessary, make an appointment with your CPA firm to go over the nonaccrual and
other reporting requirements in the Final Rule and IRPS.
5.
Beginning October 1, 2012, follow the proper accounting treatment described in the
IRPS, including coding the loan as “nonaccrual” if the loan is delinquent for 90 or more
days.
6.
Beginning October 1, 2012, restore “nonaccrual” loans to “accrual” status in
accordance with the IRPS. Remember that there are different rules for MBLs.
The End
If you have questions, please feel free to contact me:
Daniel R. Loritz, Esq.
(818) 956-8052(Direct)
Dan@OkunLoritz.com (Email)
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