RALEIGH, N.C.-The NCUA has changed its troubled debt restructuring (TDR) rule to allow credit unions to deem a restructured member mortgage loan current as soon as the loan is closed.
The change, announced at last week's board meeting, is expected to eliminate growing CU concerns over the TDR rule that has been in place since 2010. That rule requires that members who have loans reworked make six consecutive on-time payments before the loan is considered current, something numerous CUs claim artificially spikes their delinquency ratios, and as a result curtails them from making as many reworked loans as they would like.
This latest change becomes current 30 days after the new rule is published in the Federal Register, and comes as part of numerous adjustments to the TDR rules (see related story).
Last month State Employees' CU, Raleigh, N.C., was betting NCUA would change the TDR rule. Based on that assumption, SECU deemed current what appeared to be, according to March Call Report data, about $300 million in workout loans considered delinquent under the existing TDR rule. That change dropped its delinquency ratio to 1.69% at the end of March from 3.79% at the close of December.
Moving Ahead of NCUA
"We basically interpreted the rule change to already be in effect," said Robert Hall, SECU senior EVP, who added that SECU and NCUA have been going "'round and 'round" on this matter for a while. "We felt that we were being forced to overstate our delinquencies. We interpreted the new rule to be in effect and reflected that in our March statement. We then appealed to the regional director, who told us we shouldn't have done that because the rule had not been officially changed yet."
SECU then filed an amended March Call Report that set delinquencies at 3.62%. In January NCUA proposed the new TDR rule that covers how all federally insured credit unions account for delinquencies, charge-offs, and income related to troubled home mortgages and member business loans, as well as for how those loans are reported on NCUA's quarterly Call Reports.
Hall reminded that many CUs have opposed the current TDR rule that often prevents CUs from reworking as many troubled loans as they would like. He said many CUs cut back or don't do loan restructuring because they realize the current TDR rule artificially spikes their delinquency ratio and can increase regulator scrutiny. When the latest TDR rule was initiated in 2010, SECU, which has an extensive loan workout program that's helping thousands of members, saw its delinquencies jump to 2.33% from 1.45%.
Hall told Credit Union Journal that the move to lower its delinquencies was not done as a result of concerns over potential NCUA actions.
When contacted by Credit Union Journal, NCUA spokesman John Zimmerman stated that "NCUA does not talk about supervisory matters."
SECU has been very successful during the recession helping members save their homes with its Mortgage Modification Program. Members with existing SECU adjustable rate mortgage loans can lower their current interest rate to the current initial rate for new mortgages. There are no out-of-pocket costs. A modification fee of .75% of the outstanding loan balance is added to the principal balance of the loan.
SECU rates are 3.75% for one- and two-year ARMs at 90% LTV or less, a two-year ARM above 90% LTV is 4.75%, as is a five-year ARM at 90% LTV or less. SECU charges 5.75% for a five-year ARM above at 90% LTV. "[The modification program] is working," said Hall. "We have many, many members who have been able to stay in their homes with this program."
Some Questions Raised
Whether the new TDR rule was in place last week or not, a source suggested SECU could face financial difficulty if housing values in North Carolina fall or rates rise. Much of SECU's mortgage delinquencies are in adjustable rate instruments, and the credit union promotes ARMs. SECU advertising also promotes 100% financing and no PMI.
A source questioned SECU's policy to make adjustable rate loans at high LTV with no PMI to challenged borrowers. "I am sure they say they are covering that risk with above-market rates. But if North Carolina home rates fall or rates rise-and worse, both things happen-that member with no skin in the game walks away and mails in the keys. I don't think we have written the last story here."
