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ORLANDO, Fla.-Credit unions must be definitive when making loan modifications or debt restructuring and have clear evidence to back up their decisions, according to state regulators.

"If you are modifying loans, that's a good thing to do," said Robert Hayes, bureau chief of the Florida Office of Financial Regulation. "If you are aggressive with them and manage things properly it is a way to help the membership but I would stress that just to modify the loan to kick the can down the road, to hide a delinquency and delay the inevitable, you're not doing yourself any favors and you're not doing the member any."

Hayes noted the sky-high national re-default rate, well over 50% after 12 months of the modification, as chief reason to take a measured approach to restructuring. Examiners are likely to take a very close look at modification and TDR plans, and while the regulator is "not opposed" to such plans, CUs must do a thorough job of justifying their actions.

"If you're going to modify loans, then please provide us some documentation on why you did it so when we come in then we gain a better understanding of why you did what you did," said Hayes.

The bureau chief also intimated that today's economic circumstances probably warrant more TDRs than typical loan modifications. Hayes explained that restructuring programs in which the CU surrenders something, such as principal or the interest rate on the loan, must be classified as TDRs on call reports. These loans are reported as delinquent until the borrower makes payments according to the new agreements for six consecutive months. With so many individuals losing their jobs, having their hours cut or seeing permanently reduced income, TDRs likely better reflect reality.

"In almost 50 years in lending I've learned that people are not likely to go back to the higher amount [after a modification]. It happens occasionally but not very often in my lifetime," said Maury Pilver, former President/CEO and current board member at Jacksonville-based Healthcare's Cooperative CU.

But sometimes, credit unions just have to say no, commissioner Tom Cardwell told a group of CU executives and board members at the League of Southeastern Credit Unions annual conference. "That's hard to do, but we need to do it," he said.

"It may be better to face the reality of the situation today rather than wait and face it down the road because your situation may be worse than it is today," Hayes added. "When you're managing the assets of the credit union, you're managing the members assets. It's everybody's. It's not that one person you're trying to help; it's the overall group that you're trying to serve and protect."

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