POLICY AREA: LOAN POLICY
SUBJECT: LOAN MODIFICATIONS & TROUBLED DEBT RESTRUCTURE (TDRs)
POLICY: L127
This policy governs any changes in original terms, on consumer and business loans including but not
limited to real estate loans, that were agreed to at loan approval. Loan modifications and troubled debt
re-structures can be any change of original contractual terms including but not limited to payment due
date, maturity date, interest rate, or payment amount.
All loans 90 days past due will discontinue the accrual of interest, done automatically by the data
processing system. Once the loan is current or is paid under 90 days delinquent, the loan interest
accrual will automatically start again. The accounting department at Sky FCU does verify and
balance the interest accruals every month.
Loan workouts can take many forms, including a renewal or extension of loan terms, extension of
additional credit, or a restructuring with or without concessions. A renewal or restructuring should
improve the lender’s prospects for repayment of principal and interest and be consistent with sound
banking, supervisory, and accounting practices. Loan workouts will be considered after analyzing a
borrower’s repayment capacity, evaluating the support provided by guarantors, and assessing the value
of the collateral pledged on the debt. Loan workout arrangements will be designed to help ensure that
the credit union maximizes its recovery potential.
Further, renewed or restructured loans to borrowers who have the ability to repay their debts under
reasonable modified terms will not be subject to adverse classification solely because the value of the
underlying collateral has declined to an amount that is lessthan the loan balance.
A. Eligibility Requirements for a Loan Modification & Troubled Debt Restructure (TDRs)
1) For TDRs:
(a) the borrower must demonstrate a legitimate financial hardship – i.e., decrease in
income/increase in expenses. The reasons for the hardship must be shown in written
form by the borrower.
(b) the borrower must demonstrate how the debt restructure request will allow them to
service the debt on a timely basis going forward.
(c) CU grants a concession to the member debtor that it would not otherwise consider.
A loan extended or renewed at a stated rate equal to the current interest rate or
market rate is not considered a TDR loan. These financial difficulties could be legal
or economic. TDRs are always evidenced by an agreement between the parties or
are based on terms imposed by a court of law.
(
d) Terms modified under troubled debt restructuring could include an increase in term, a
reduction in interest or principle. Following would be considered a concession:
i. Reduction of the principle amount of debt;
ii. Reduction in the amount of accrued interest;
iii. Extension of maturity at a favorable interest rate (below market that
you would not give any other member)
2) For a loan modification to qualify, the borrower need not have a financial hardship. A
loan modification can be any loan where the original terms can be modified. Examples
may include:
(a) The borrower may want a review of credit score per the Managed Credit Policy and
potential lower rate based on credit score improvement per policy.
(b) A member’s business may be seasonal i.e. a landscaping business in which we may
change payments to interest only versus principal and interest as income levels
change with the seasons.
3. A loan modification may be a refinance of a delinquent loan. A trial period will be
established for delinquent loans to be modified. For example: Delinquent members
on consumer loans will be required to demonstrate an “ability and willingness” to
repay under the modified terms for a period of ninety (90) days (three payments at the
modified terms) before the loan modification becomes permanent. The Lender will
analyze the borrower’s overall financial condition, resources and payment record for
this modification and trial period of payments.
4. For loan modification purposes, there may be no maximum loan-to-value ratios.
5. The objectives of a residential real estate loan modification or a consumer loan are to help
members who are struggling financially to maintain ownership of their homes and or other
collateral and to minimize the credit union’s default and foreclosure costs.
6. Lowering the monthly payment, sufficiently to make it affordable in the longer term, may
result in a more sustainable loan modification.
B. Key elements may include, but are not limited to, the following, if the credit union
agrees to modify a Consumer loan or grant a TDR:
1) A standard loan evaluation worksheet as well as a loan modification worksheet shall
be completed for all loan modifications and TDRs.
(a) Updated and comprehensive financial information, documentation/ verification of
the borrower and any guarantor, which includes all income and expenses;
(b) Current valuations of the collateral supporting the loan and the workout plan;
(c) Appraisals will be required on loans $250,000 or more;
(d) Analysis and determination of appropriate loan structure (i.e. term and amortization
schedule);
(e) Appropriate legal documentation for any changes to loan terms
(f) Lender will determine and verify the borrower’s monthly obligations
by obtaining a new credit report and do the appropriate analysis and
determination of appropriate loan structure (i.e. term and amortization
schedule);
(g) Lender will calculate a debt ratio with a target range knowing that these TDRs make
it difficult to have a debt ratio that is seen under normal standards. The real
emphasis comes in the cash flow and net disposable income. The two will be used
interchangeably in order to have a dual evaluation of cash flow instead of a one
dimensional ratio that can be limiting. This calculation will help structure the loan
modification or TDR in order for the member to afford the new modified payment;
(h) The lender will analyze the current financial information of the borrower
and/or guarantor that supports the ultimate collection of principal and
interest;
(i) Lender may pursue a qualified co-borrower or guarantor if feasible.
(j) Normally, the lender will do the mortgage modification for a one-year term with the
option to go two years or longer with maximum of 5-years, if the situation warrants it,
based on the economy or economic factors which dictate the borrower’s current
financial condition.
POLICY AREA: LOAN POLICY
SUBJECT: LOAN MODIFICATIONS & TROUBLED DEBT RESTRUCTURE (TDRs)
POLICY: L127 (Cont.)
(k) While monitoring the progress of the TDR, as conditions improve, adjustments to
the terms of the loan will be made accordingly, over time, to benefit the member and
credit union.
(2) If extending the term and lowering the interest rate still does not result in a reasonable
payment, consideration shall be given to creating a “silent second” or breaking the loan or
loans into two separate loans:
a. The first, with the longest term, lowest interest rate and largest portion of
the total principal to reach the target debt ratio;
b. The second could be a 0% interest rate, zero payment balloon note, with
the term matching the length of the modification. The second will be
secured by the same collateral and additional collateral if possible. This
could be another piece of collateral which is unencumbered, or a second
lien (if possible) on another vehicle, a third trust deed on real property or
even a UCC-1 on the member’s personal property. The additional liens
could make the member more inclined to repay.
(3) The lender may prohibit cash advances except when required to protect the
collateral.
(4) Proper monitoring of the ongoing performance of the borrower and
guarantor under the terms of the workout plan will be conducted. This will be done
through the completed and updated monthly, Modification/TDR Log in addition to coding
the modified loans in the data system.
C. Key elements may include, but are not limited to, the following, if the credit union
agrees to modify a Business loan or grant a TDR:
(1) Business Lender will require:
a. Updated and comprehensive financial information on the borrower, real
estate project, and any guarantor;
b. Current valuations of the collateral supporting the loan and the workout
plan;
c. Analysis and determination of appropriate loan structure (i.e. term and
amortization schedule)
d. Appropriate legal documentation for any changes to loan terms
e. Analysis of the borrower’s global debt service that reflects a realistic
projection of the borrower’s and guarantor’s expenses
(2) Business loan modifications and TDRs may require additional information based on the
complexity of the loan. This includes, but is not limited to;
a. The status of the external environment, including a market analysis with
information such as the local economy, changes to the neighborhood,
comparable rentals in the market, vacancy rates, rental rates, et cetera;
b. The status of the underlying source of cash flows i.e. current rent roll,
vacancies et cetera
c. Any additional assets that the member could provide as collateral such
as other real estate, cash value of life insurance et cetera
POLICY AREA: LOAN POLICY
SUBJECT: LOAN MODIFICATIONS & TROUBLED DEBT RESTRUCTURE (TDRs)
POLICY: L127 (Cont.)
3. If extending the term and lowering the interest rate still does not result in a reasonable
interest rate, consideration shall be given to creating a “silent second” or breaking the loan or
loans into two separate loans:
(a) The first, with the longest term, lowest interest rate and largest portion of the
total principal to reach the target debt ratio;
(b) The second could be a 0% interest rate, zero payment balloon note, with the
term matching the length of the modification. The second will be secured by
the same collateral and additional collateral if possible. This could be
another piece of collateral which is unencumbered, or a second lien (if
possible) on another vehicle, a third trust deed on real property or even a
UCC-1 on the member’s personal property. The additional liens could make
the member more inclined to repay.
4. The lender may prohibit cash advances except when required to protect the collateral.
5. Proper monitoring of the ongoing performance of the borrower and guarantor under the terms
of the workout plan will be conducted.
6. Loan modifications and TDRs will be documented on a loan log for these purposes and
reported monthly to the Board of Directors.
7. An internal grading system will reflect the risk in the workout arrangement on business loans.
8. Sky FCU’s ALLL methodology will recognize any potential credit losses in a timely manner
through provisions and charge-offs as appropriate.
D. Approval and Documenting Modifications
1. The loan committee will be responsible for determining whether or not a
consumer loan modification should be granted. Business loan modification will follow the
same approval guidelines as defined in the business loan policy.
2. All modifications and TDRs will be recorded on the Modification Loan or
Troubled Debt Restructure (TDRs) Logs. On consumer loans, the VP of Lending and or
Lending Manager will be responsible for the modification and TDRs reporting on the
appropriate log. On Business Loan modifications and TDRs, the Senior Business Lender will
be responsible to have all modifications and TDRs recorded on the appropriate reports and
logs.
3. Loan Modifications and Troubled Debt Restructures will be reported to the
Board of Directors on a monthly basis.
Policy Adopted: 05/20/09
Policy Revised: 09/23/10
Policy Revised: 11/22/11
Policy Revised 04/24/12
Policy Revised 04/24/13
By the Board of Directors
_____________________
President/CEO