NCUA Updates Exam Guidance on Loan Workouts, Nonaccrual, TDR Reporting

The National Credit Union Administration (NCUA) issued Letter to Credit Unions 13-CU-03 on April 3, sharing with credit unions the same Trouble Debt Restructuring (TDR) guidance the NCUA shared with its examiners.

In addition to describing in detail how examiners will apply the regulatory improvements approved last year by the NCUA board of directors, the Supervisory Letter will help credit unions understand their examiner’s focus on specific components of a sound workout program, including:

  • The revised regulatory reporting requirements for loan workouts;
  • What you should address in a workout policy including controls and decision-support systems consistent with the size and scope of your program;
  • Key components of a sound information system for loan workouts and TDRs; and
  • Appropriate nonaccrual policies and procedures for loan workouts and TDRs.

When scoping the loan workout review, examiners will consider the following:

  • Does the credit union have appropriate system capability and internal controls to track and monitor all workout activity given the size and complexity of the organization?
  • What is the balance of workout activity including TDRs?
  • What is the balance of TDR compared to workout activity?
  • What is the percentage of workout or TDR activity in relation to capital, earnings and volume of loan activity?
  • Is the level of earnings sufficient to withstand proportionate incremental differences in allowance for loan and lease loss (ALLL) valuations without causing a reader of the financial statements to reach incorrect conclusions about the health of the credit union?
  • How great would incorrect accounting or valuation need to be to result in a lower net worth category?
  • How great would incorrect accounting or valuation need to be to cause positive earnings to become negative?
  • Could any external local economic variables result in a more material impact from misclassification, such as local real estate price trends, local unemployment rates, or sponsor layoffs?

Examiners will focus on the following four specific areas related to credit unions’ policies:

  • The policy should be commensurate with each credit union’s size and complexity, and must be in line with the credit union’s broader risk mitigation strategies.
  • The policy must define borrower eligibility requirements (i.e. under what conditions the credit union will consider a loan workout), including establishing limits on the number of times it will modify an individual loan.
  • The policy must also ensure the credit union makes loan workout decisions based on the borrower’s renewed willingness and ability to repay the loan.
  • The policy must establish sound controls to ensure responsible staff appropriately structure loan workout actions.

For Northwest Credit Union Association (NWCUA) member credit unions that have already registered for CU Policy Pro, policy # 3165 provides a good model policy that meets these requirements.

Not registered for CU Policy Pro? NWCUA member credit unions can register here for this service at no cost.

A sound management information system framework should be able to identify and document any loan that is re-aged, extended, deferred or rewritten, including the frequency and extent of the actions taken.  In addition, systems should be able to track the principal reductions and charge-off history of loans in workout programs by the type of program.

The nonaccrual requirements are designed to ensure the credit unions are following generally accepted accounting principles (GAAP) to ensure appropriate income recognition.

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

Posted in Around the NW, Community Impact, Compliance, Financial Education, NCUA.