National Credit Union Administration (NCUA) this morning proposed new rules for troubled debt restructurings that will cover 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.
The proposal, issued for a brief 30-day comment period, will require all federally insured credit unions to develop written loan work-out policies that describe eligibility for loan modifications, limits on modifications, and the timely recognition of losses and of non-accruals.
The new policy, which will be formalized in an Interpretative Ruling and Policy Statement, or IRPS, comes as credit unions and all lenders are continuing to be hit by troubled loans and the need to modify or restructure the terms of those loans. NCUA figures show that the number of modified loans on the books of federally insured credit unions have almost doubled since 2009 to 350,000, with a balance of $13.5 billion at Sept. 30, 2011.
The aim of the proposed policy is to both help troubled credit union members stay in their homes and limit the risk restructured loans pose to credit unions.
The proposal will eliminate the current reporting of "modified loans" and replace it with loans falling under a broader definition of troubled debt restructurings defined by generally accepted accounting principles, or GAAP.
Provisions of Proposal
Among the provisions of the NCUA proposal:
• All federally insured credit unions are to calculate and report TDR loan delinquency based on restructured contract terms.
• CUs are to cease accruing interest on loans at 90 days or more past due.
• CUs are to maintain member business loan work-out loans on non-accrual status until the credit union receives six consecutive payments under the modified terms.
The proposal will require a formally restructured member business loan workout to remain in non-accrual status until the credit union can document a current credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. Thee valuation must include consideration of the borrower's sustained historical repayment performance for a reasonable period prior to the date on which the loan is returned to accrual status.
NCUA Chairman Debbie Matz acknowledged the short comment period, but said, "We want to implement this important policy as quickly as possible."
The NCUA Board also approved a final rule that will require all federally insured credit unions over $10 million in assets to develop and follow a written interest-rate risk policy, with an exemption for credit unions from $10 million to $50 million with a percentage of first mortgages and investments greater than five years that is less than 100% of net worth.
The new rule will be effective Sept. 30.