FASB Bid On Troubled Debt Restructurings To Mean More CU Losses
NORWALK, Conn. – A comment letter submitted by NCUA and the banking regulators has given the Financial Accounting Standards Board second thoughts to a proposed rule on accounting for troubled debt restructuring and could at least delay the implementation date.
The federal regulators told the accounting rules-makers the proposed rule, which sets new standards for troubled debt restructuring, both for purposes of recording an impairment and for disclosure, could create uncertainty in credit union and bank statements and boost loan losses. The accounting proposal would apply to mortgage loan refis and restructuring of car, credit card and other consumer loans due to a member job loss or other economic problem.
The proposed rule already is being adopted at some credit unions and increasing delinquencies and losses. North Carolina State Employees CU said it opted for early adoption for its Dec. 31, 2010 financials, which caused an increase in reported delinquency to 1.56%, compared to just 0.62 % as of Dec. 30, 2009. The credit union delinquency ratio without the TDR adjustment would have been just 0.93%. The increase in delinquency as of Dec. 31, 2010 created by the new TDR reporting provisions was 0.63%.
The FASB, which originally set a June 15, 2011, voluntary implementation date and Dec. 15 mandatory deadline, is said to be reconsidering the deadline, especially in light of the ascension of Leslie Seidman, a longtime member of the seven-member board, to chairman of the panel.
The regulators told the FASB in a comment letter on the proposal last month they are concerned that a provision regarding a borrower’s inability to obtain similar financing at a market rate of interest may be interpreted that would cause mortgage modifications, extensions and renewals as troubled debt restructurings and this be subject to write-downs. The regulators, NCUA, the FDIC Federal Reserve, Office of Thrift Supervision and Comptroller of the Currency, noted that many creditworthy borrowers may be having trouble now obtaining credit at market rates because in some markets credit is not available at all.
The regulators asked the FASB to modify the proposal so that restructuring absent a market rate is not automatically considered a troubled debt restructuring. Just as troubling, said the regulators, is a provision that would make the accounting retrospective. “We have concerns,” they wrote, “that institutions, particularly those that are small, will not have adequate access to prior information sufficient to determine whether prior modifications should have been considered TDRs.”
The debt restructuring rule is one of the several controversial proposals facing Seidman, a 48-year-old, one-time FASB staffer, as she assumes control of the accounting rules-setters. The FASB also is considering a rule that would extend the use of market value accounting, also known as fair value accounting, to assets such as loans.
Seidman is succeeding Robert Herz, the former FASB Chairman, who will best be remembered for agreeing to have the FASB change its rules on accounting for unrealized losses after being brow-beaten by Pennsylvania Congressman Paul Kanjorski and others during 2009 congressional testimony while banks and corporate credit unions were facing huge losses on their investments.