SAN DIEGO — All loan modifications are not created equal.
That was the message from Kevin Durrance, EVP and chief financial officer for Georgia FCU, Atlanta, who noted that because some loan mods show up on a Call Report and others don't, credit unions need to be careful about what and how they modify for their members.
Prior to the current recession, Durrance explained to the CUNA Lending Council's annual meeting here, Chapter 13 bankruptcies used to be the most common types of TDRs (Troubled Debt Restructured) on credit unions' books. "These were referred to as a 'cramdown' because the lender was forgiving, by order of a court, part of the principle," he explained.
In legal terms, any contractual change to a loan is considered a "modification," Durrance continued. He noted any type of loan can be modified, but advised CUs in the case of real estate modifications to have an attorney handle the matter.
"Credit card modifications and car loan modifications are not reported on a Call Report, but real estate loan modifications must be reported - except a simple refinance to fair market interest rates," he said. "TDRs have to be related to the financial difficulties of members."
In a recent change, TDRs must continue to be reported as delinquent until the borrower makes six consecutive on-time monthly payments. Durrance said. This is up from three on-time payments.
Reporting modified real estate loans is "not a bad thing," Durrance insisted, because NCUA wants to be able to report to Congress that CUs are helping members stay in their homes.
When deciding whether to make a loan modification, Durrance advised CUs to compare the cost of a concession to the estimated cost of foreclosure.
"If you can keep the member in that house and avoid the cost of an OREO, then so what if you have to report a delinquency for six months? On the other hand, if the cost of the concession is greater, then you have a fiduciary duty to the rest of your members to keep the financial institution safe and sound. Remember: if you are not there, you can't help anybody else."
