New FASB Rule On Troubled Debt Restructuring Could Ease CU Loss Reserves
WASHINGTON – New guidance on troubled debt restructurings issued last week by the Financial Accounting Standards Board could ease allowance for loan losses for credit unions.
The new FASB guidance, treated by regulators as a rule, will give credit unions and banks new criteria for determining whether a particular loan modification represents a troubled debt restructuring for accounting purposes. The determination is significant because it also signals when a credit union should record an impairment loss associated with the same loan.
The new guidance tells credit unions and banks to take a careful look at whether a borrower is experiencing financial difficulty and whether the lender has granted some type of concession to the borrower as a result. The guidance tells lenders that a borrower could be considered to be experiencing financial difficulty even if it has not defaulted on the loan. It also specifies that if a borrower cannot access funds at a market interest rate for a new loan, it indicates any modification to a below-market rate should be considered a concession on the bank’s part.
NAFCU last week called on NCUA to give credit unions some leeway in interpreting the guidance that would effectively ease allowance for loan losses.
“As NCUA takes action on TDR guidance, we believe it is also important to revise the Call Report and other guidance to shift away from requiring credit unions to report TDRs as delinquent for six months until a payment history is established,” NAFCU President Fred Becker wrote in a letter to the NCUA Board. “While we understand that the purpose of the six months repayment requirement to change the status of a loan from a TDR to accrual status is to demonstrate the borrower’s ability to repay, we believe that six months is too long and should be shortened.”
NCUA, wrote Becker, should revise its Call Reports based on the FASB guidance so if a member is no longer facing financial difficulties before the six months period ends, the credit union should be able to adjust the status of the modified loan to accrual status. For example, if the borrower’s financial difficulties resulted from being unemployed, but within six months of the loan restructuring the borrower is fully employed, the credit union should be able to change the loan’s status.