NCUA Rules Require Written Loan Workout and Nonaccrual Policies by Month’s End

The National Credit Union Administration (NCUA) issued final rules requiring each federally insured credit union to adopt written policies addressing loan workouts and loan nonaccrual by Oct. 1, 2012.

Loan Workout Policy:

The NCUA defines a loan workout as a loan to a borrower in financial difficulty that has been formally restructured so as to be reasonably assured of repayment and of performance according to its restructured terms. Typical loan workouts include re-aging, extension, deferral, renewal, or rewrite of the loan. Loan workouts do not include borrower retention programs or new loans.

The policy should be commensurate with each credit union’s size and complexity and be in line with the credit union’s broader risk management strategies. The basic elements that must be included in the policy are:

  • Define the eligibility requirements (Under what conditions will the credit union consider a loan workout);
  • Establish defined limits on the number of times an individual loan may be modified;
  • Ensure the decision to grant the loan workout is based on the borrower’s renewed willingness and ability to repay the loan. (This must be documented);
  • Establish sound controls to ensure the loan workout actions are appropriately structured; and
  • No additional advance of funds is allowed to finance unpaid interest or fees. Additional advance of funds may be used to cover third party fees such as force-placed insurance or property taxes.

Decisions to re-age, extend, defer, renew, or rewrite a loan need to be supported by the credit union’s management information systems. Sound management information systems are able to identify and document any loan that is re-aged, extended, deferred, renewed, or rewritten, including the frequency and extent such action has been taken. Appropriate documentation typically shows that the FICU’s personnel communicated with the borrower, the borrower agreed to pay the loan in full, and the borrower has the ability to repay the loan under the new terms.

Loan Nonaccrual Policy:

To ensure appropriate income recognition federally insured credit unions will need to have written Loan Nonaccrual Policies. The policy on Loan Nonaccrual must specifically address:

  • The discontinuance of interest accrual on loans that are past due by 90 days or more by placing the loans in nonaccrual status;
  • Reversing previously accrued but uncollected interest;
  • Complying with criteria under GAAP for Cash or Cost Recovery basis of income recognition; and
  • The requirements for returning such loans (including MBL workouts) to accrual status.

FICUs are not to accrue interest on any loan upon which principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection. This applies to all loans, both those in workouts and those not in workouts. Additionally, FICUs will need to place loans in nonaccrual status if the loan is maintained on a Cash (or Cost Recovery) basis because of deterioration in the financial condition of the borrower, or for which payment in full is not expected.

A consumer loan may be returned to accrual state when its past due status is less than 90 days, GAAP does not require it to be maintained on the Cash or Cost Recovery basis, and the credit union can reasonably expect repayment of the loan.

A member business loan must remain in nonaccrual status until the credit union can document a current credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms. The evaluation must include consideration of the borrower’s sustained historical repayment performance for a reasonable period prior to the date the loan is returned to accrual status. A sustained period of repayment performance would be the minimum of six consecutive months and would involve timely payments under the restructured loan’s terms.

 

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance, Industry Insight, NCUA, Strategic Link.