ALEXANDRIA, Va. – The NCUA Board approved new rules this morning requiring all credit unions to establish written policies on loan work-outs, also known as troubled debt restructurings, that will make it easier for credit union reporting and add some to the bottom line by potentially reducing the amount to be set aside for loan loss reserves.
The new rules, enacted as an Interpretive Ruling and Policy Statement, will require management of all federally insured credit unions to maintain written policies that address loan work-out arrangements and nonaccrual policies of loans consistent with industry standards.
The new rules will help both credit unions and their members by clarifying what has often been an ad hoc process and reducing foreclosures, according to NCUA Chairman Debbie Matz. “(More) members can keep their homes if they meet the requirements of their credit unions,” said Matz.
The new rules will also help credit unions by eliminating the need to maintain separate manual delinquency calculations on the past due status of loans. This goes into effect June 30.
The rest of the rules go into effect Oct. 1.
The rules codify what has long been industry practice by requiring credit unions to stop accruing interest on all loans 90 days or more past due and specifies that each credit union have its own standards for returning those loans, including member business loan work-outs, to accrual status.
The final rule specifies when a credit union must place a loan in nonaccrual status, including the reversal of previously accrued but uncollected interest; sets the conditions for restoration of a nonaccrual loan to accrual status; and discusses the criteria under Generally Accepted Accounting Principles for cash or cost recovery basis if income recognition.
A loan may be returned to accrual status when its past due history is less than 90 days; when it becomes well-secured and in the process of collection; and the asset is a purchased impaired loan and it meets accounting criteria for accrual of income under the interest method.
The rules also address the treatment of cash interest payments received during periods of loan nonaccrual and prohibits the restoration of previously reversed or charged-off accrued, but uncollected, interest applicable to any loan placed in nonaccrual status.
NCUA said it made several changes to the proposal it issued in January, including eliminating an aggregate limit on TDRs and easing standards for MBL work-outs.
Matz said the main focus of a TDR policy should be a credit union’s ability to maintain it. “Examiners will be looking at each policy to make sure each credit union’s policy is commensurate with the credit union’s complexity,” she said.
The new rules require a formally restructured MBL work-out to remain in nonaccrual status until a credit union can document a current credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. The evaluation must include consideration of the borrower's sustained historical repayment performance for a reasonable period prior to when it was marked nonaccrual. A sustained period of repayment performance would be a minimum of six straight timely payments under the terms of the restructured loan.
Larry Fazio, deputy executive director for NCUA, said the agency will be explaining the details of the new rule in a Letter to CUs and a webinar, and to examiners in a webinar in the near future.
