[Federal Register Volume 77, Number 21 (Wednesday, February 1, 2012)]
[Proposed Rules]
[Pages 4927-4937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2206]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 77, No. 21 / Wednesday, February 1, 2012 / 
Proposed Rules  

[[Page 4927]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741

RIN 3133-AE01


Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of 
Troubled Debt Restructured Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to amend its regulations to require federally 
insured credit unions (FICUs) to maintain written policies that address 
the management of loan workout arrangements and nonaccrual policies for 
loans, consistent with industry practice or Financial Institutions 
Examination Council (FFIEC) requirements. The proposed rulemaking 
includes guidelines set forth as an interpretive ruling and policy 
statement (IRPS) and incorporated as an appendix to the rule that will 
assist FICUs in complying with the rule, including the regulatory 
reporting of troubled debt restructured loans (TDR loans or TDRs) in 
FICU Call Reports. The NCUA Board (Board) believes this proposed 
rulemaking and IRPS is timely considering the growth of these types of 
loans during the recent economic stresses experienced in the financial 
industry.

DATES: Send your comments to reach us on or before March 2, 2012. We 
may not consider comments received after the above date in making our 
decision on the proposed rule.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule 741/IRPS 12-1, ``Loan Workouts'' in the 
email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: You can view all public comments on NCUA's Web 
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as 
submitted, except for those we cannot post for technical reasons. NCUA 
will not edit or remove any identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Director of Supervision Matthew J. 
Biliouris and Chief Accountant Karen Kelbly, Office of Examination and 
Insurance; at the above address or telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION: 

I. Background
II. The Rule and IRPS as Proposed
III. Analysis of Rule Amendment and IRPS
IV. Regulatory Procedures

I. Background

Why is NCUA proposing this rule and IRPS?

    The economic challenges of the last several years have resulted in 
an increasing number of distressed borrowers. In order to better serve 
members experiencing financial difficulties and improve collectability, 
FICUs have worked with members and offered sensible workout loans, 
including programs offered through the Obama Administration's ``Making 
Home Affordable Program'' (MHA). MHA is an important part of the Obama 
Administration's comprehensive plan to stabilize the U.S. housing 
market by helping homeowners get mortgage relief and avoid 
foreclosure.\1\
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    \1\ MHA was developed to help homeowners avoid foreclosure, 
stabilize the country's housing market, and improve the nation's 
economy. MHA includes such programs as the ``Home Affordable 
Refinance Program'' (HARP) and ``Home Affordable Modification 
Program'' (HAMP). Programs such as these further enable FICUs to 
provide workout loans to their members. For additional information 
regarding programs available through MHA see http://www.makinghomeaffordable.gov/pages/default.aspx.
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    NCUA Call Report data illustrates FICU loan modifications have 
increased 60 percent, or $5 billion, from March 2010 to September 2011, 
proving FICUs are working with their members during this stressful 
economic downturn.\2\ FICUs reported $13.5 billion in outstanding 
balances of loans that have been modified on the September 2011 Call 
Report, of which 62.6 percent, or $8.5 billion, are TDR loans--see 
Figure 1 below.\3\ FICUs reported modifying $4 billion in loans, with 
$2.4 billion reported as TDR loans, for the first nine months of 2011. 
September 2011 data also reported approximately 42,000 delinquent 
modified loans totaling $2.2 billion, which equates to a 16.42 percent 
delinquency rate for these loans.
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    \2\ NCUA began collecting data on modified real estate loans 
with the September 30, 2008 Call Report. Data regarding other types 
of modified loans was added with the March 31, 2010 Call Report.
    \3\ ``Troubled Debt Restructuring'' is as defined in generally 
accepted accounting principles (GAAP) and means a restructuring in 
which a credit union, for economic or legal reasons related to a 
member borrower's financial difficulties, grants a concession to the 
borrower that it would not otherwise consider. The restructuring of 
a loan may include, but is not necessarily limited to: (1) the 
transfer from the borrower to the credit union of real estate, 
receivables from third parties, other assets, or an equity interest 
in the borrower in full or partial satisfaction of the loan, (2) a 
modification of the loan terms, such as a reduction of the stated 
interest rate, principal, or accrued interest or an extension of the 
maturity date at a stated interest rate lower than the current 
market rate for new debt with similar risk, or (3) a combination of 
the above. A loan extended or renewed at a stated interest rate 
equal to the current market interest rate for new debt with similar 
risk is not to be reported as a restructured troubled loan. FASB ASC 
310-40, ``Receivables, Troubled Debt Restructurings by Creditors.''
    \4\ NCUA began collecting the number of delinquent modified 
loans with the September 30, 2009 Call Report.
    \5\ Federal Credit Union (FCU) and Federally-Insured State 
Credit Union (FISCU).

[[Page 4928]]



                                                       Figure 1--Summary of Loan Modification Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Reported          Reported
                                                      Reported        Reported       Percent of total    delinquent        delinquent       Delinquent
                                                      modified     modified  loan   loans outstanding   modified loan    modified loan       modified
                                                     loan count       balance                             count \4\         balance         percentage
--------------------------------------------------------------------------------------------------------------------------------------------------------
2008:
    FCU \5\.......................................        4,855       $702,903,362               0.23             N/A       $156,418,754           22.25
    FISCU.........................................        5,400        782,308,903               0.30             N/A        164,981,230           21.09
                                                   -----------------------------------------------------------------------------------------------------
        Totals....................................       10,255      1,485,212,265               0.26             N/A        321,399,984           21.64
--------------------------------------------------------------------------------------------------------------------------------------------------------
2009:
    FCU...........................................       15,562      2,779,601,418               0.89           3,259        619,178,160           22.28
    FISCU.........................................       19,485      3,247,090,975               1.24           3,590        679,078,846           20.91
                                                   -----------------------------------------------------------------------------------------------------
        Totals....................................       36,047      6,026,692,393               1.05           6,849      1,298,257,006           21.54
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010:
    FCU...........................................      189,809      6,161,299,433               2.01          23,390      1,024,208,423           16.62
    FISCU.........................................      116,259      5,561,026,453               2.15          16,330      1,084,561,131           19.50
                                                   -----------------------------------------------------------------------------------------------------
        Totals....................................      306,068     11,722,325,886               2.08          39,720      2,108,769,554           17.99
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sept 2011:
    FCU...........................................      207,067      6,789,980,370               2.20          21,274        929,089,211           13.68
    FISCU.........................................      141,235      6,705,125,149               2.59          20,662      1,287,161,821           19.20
                                                   -----------------------------------------------------------------------------------------------------
        Totals....................................      348,302     13,495,105,519               2.38          41,936      2,216,251,032           16.42
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As specified in the ``Interagency Question and Answers for 
Accounting for Loan and Leases Losses'' and distributed through NCUA 
Accounting Bulletin 06-01 (December 2006), NCUA's current regulatory 
reporting policy for TDR loans is: \6\
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    \6\ Current Call Report instructions reflect this requirement. 
See http://www.ncua.gov for additional information.
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    For regulatory reporting purposes on the Call Report, credit unions 
should report TDR loans (as defined in GAAP) as delinquent consistent 
with the original loan contract terms until the borrower/member has 
demonstrated an ability to make timely and consecutive monthly payments 
over a six month period consistent with the restructured terms. 
Likewise, such loans may not be returned to full accrual status until 
the six month consecutive payment requirement is met.
    As previously discussed, data supports FICUs are modifying loans to 
assist their members, the majority of which are considered TDRs. The 
increased volume of this activity coupled with the existing reporting 
requirements has underscored the practical challenges for the industry. 
The Board is aware that in order to follow the agency's Call Report 
instructions for TDRs, most FICUs must maintain separate, manual 
delinquency computations and nonaccrual schedules. In response to 
feedback from the industry and in the spirit of reduced regulatory 
burden, the Board proposes to revise this reporting requirement and 
allow delinquency on TDR loans to be calculated consistent with loan 
contract terms, including amendments made to loan terms by a formal 
restructure.
    The Board also believes there is confusion regarding what NCUA has 
defined on the Call Report as a ``Modified Loan'' for purposes of data 
collection, workout loans as defined in various interagency guidance, 
and TDRs as defined by GAAP. To address this confusion, the Board 
proposes to further revise the regulatory reporting requirements by 
eliminating data collection on ``Modified Loans'' and targeting data 
collection efforts to loans meeting the definition of a TDR under GAAP. 
In addition, it is important to recognize the Financial Accounting 
Standards Board (FASB) issued on April 5, 2011, Accounting Standards 
Update No. 20-11--Receivables (Topic 310) ``A Creditor's Determination 
of Whether a Restructuring is a Troubled Debt Restructuring.'' \7\ This 
Standards Update clarified the definition of a TDR, which has the 
practical effect in the current economic environment to broaden loan 
workouts that constitute a TDR. Therefore, the Board concludes that 
focusing regulatory reporting requirements on TDRs will satisfy NCUA's 
data collection and offsite supervision needs.
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    \7\ This standard is effective for annual periods ending on or 
after December 15, 2012, including interim periods within those 
annual periods.
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    Over the last several years, the Board has reconfirmed its view 
that prudent and sound loan workouts can be an effective tool to assist 
financially distressed members. Similarly, the Board understands and 
recognizes the need to effectively balance appropriate loan workout 
programs with potential safety and soundness considerations. Safety and 
soundness concerns related to such programs include the potential to 
mask deterioration in the quality of the loan portfolio, especially 
given the tendency for a high degree of relapse into past due status; 
delay loss recognition; and to ensure appropriate income 
recognition.\8\ The Board's current policy of requiring delinquency be 
calculated on the original contract terms for six consecutive payments 
under the restructured terms was intended to provide the regulatory 
controls necessary to address the issues described above. With the 
proposal to modify this regulatory reporting requirement, the Board is 
clarifying regulatory expectations for the proper control of these 
lending activities.\9\

[[Page 4929]]

These include requiring each FICU to have a written loan workout policy 
and associated monitoring and controls, and formalizing the existing 
practice of nonaccrual standards for past due loans.
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    \8\ See NCUA Letter to Credit Unions (LCU) 07-CU-06 ``Working 
with Residential Mortgage Borrowers'' at http://www.ncua.gov; FFIEC 
Press Release dated March 4, 2009, ``Making Home Affordable'' at 
http://www.ncua.gov; LCU 09-CU-04, ``Making Homes Affordable--A 
Program for Mortgage'' at http://www.ncua.gov; FFIEC Press Release 
August 6, 2009 at http://www.ffiec.gov; LCU 10-CU-07, ``Commercial 
Real Estate Loan Workouts'' at http://www.ncua.gov.
    \9\ At the time of publishing the Interagency ALLL Policy 
Statement (July 2001), the banking regulators, through the FFIEC, 
had in place policy requirements related to the loan account 
management matters, in guidance entitled ``Uniform Retail Credit 
Classification and Account Management Policy.'' 65 FR 36903 (June 
12, 2000). When the Board implemented IRPS 02-3 conforming the ALLL 
to GAAP and banking regulators' like policies, it did not adopt 
parallel loan account management guidance for FICUs.
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    Call Report data further indicates FISCUs engage in comparable 
volume of this type of activity and experience similar performance 
trends as FCUs (see Table 1 above). As both FCUs and FISCUs actively 
engage in loan workout programs it is important for managing risk to 
the National Credit Union Share Insurance Fund (NCUSIF) that all FICUs 
adhere to the same minimum standards for such programs. The Board, 
therefore, proposes to amend Section 741.3 relating to required FICU 
lending policies in order to specifically address the management of 
loan workouts and nonaccrual practices.

II. The Rule and IRPS as Proposed

A. How would the proposal change current practice?

    This proposal establishes standards for the management of loan 
workout arrangements that assist borrowers; revises regulatory 
reporting requirements related to TDR loans; and reaffirms the existing 
policy and practice within the credit union industry of placing loans 
on nonaccrual status when they reach 90 days past due. The following 
table summarizes these specific changes:

----------------------------------------------------------------------------------------------------------------
                                                                                         Current requirement
               Topic                   Current requirement    Proposed requirement            reference
----------------------------------------------------------------------------------------------------------------
Loan workout policy................  No formal requirement.  All federally insured   NCUA Letter to Credit
                                     NOTE--NCUA has           credit unions must      Unions (LCU) 09-CU-19,
                                      provided specific       have a written loan     ``Evaluating Residential
                                      guidance on loan        workout policy.         Real Estate Mortgage Loan
                                      modification policies                           Modification Program,''
                                      for real estate loans                           (September 2009), http://
                                      and commercial loan                             www.ncua.gov
                                      workouts.                                      FFIEC ``Uniform Retail
                                                                                      Credit Classification and
                                                                                      Account Management
                                                                                      Policy'' 65 FR 36903 (June
                                                                                      12, 2000) LCU 10-CU-07,
                                                                                      ``Commercial Real Estate
                                                                                      Loan Workouts,
                                                                                      transmitting Interagency
                                                                                      Policy Statement on
                                                                                      Prudent Commercial Real
                                                                                      Estate Loan Workouts''
                                                                                      (June 2010), and Enclosure
                                                                                      http://www.ncua.gov.
TDR Delinquency Reporting..........  Calculate and report    Calculate and report    2006 Interagency Allowance
                                      TDR loan delinquency    TDR loan delinquency    for Loan and Lease Losses
                                      based on original       based on restructured   (ALLL) Policy Statement
                                      contract terms until    contract terms.         and Interagency FAQ on
                                      the member has made                             ALLL transmitted by NCUA
                                      six consecutive                                 Accounting Bulletin 06-1
                                      payments under                                  (December 2006), http://
                                      modified terms.                                 www.ncua.gov.
Data Collection of Loan              Data collection         Data collection         NCUA 5300 Call Report.
 Modification and TDRs.               involves both           reduced to TDRs as
                                      modified loans as       defined by GAAP.
                                      defined by NCUA and
                                      TDRs as defined by
                                      GAAP.
Loan Nonaccrual Policy.............  No formal requirements  All federally insured   Nonaccrual policy not
                                      except for TDRs. For    credit unions must      currently memorialized in
                                      TDRs, maintain in       cease accruing          a current policy document
                                      nonaccrual until        interest on loans at    but has been consistent
                                      receive 6 consecutive   90 days or more past    credit union practice, and
                                      payments.               due (with some          is supported by their
                                                              exceptions).            existing tracking systems.
Member Business Loan (MBL) Workout   No formal requirements  All federally insured   LCU 10-CU-07, ``Commercial
 Nonaccrual Policy.                   except for TDRs. For    credit unions must      Real Estate Loan Workouts,
                                      TDRs, maintain in       maintain member         transmitting Interagency
                                      nonaccrual until        business workout        Policy Statement on
                                      receive 6 consecutive   loans in a nonaccrual   Prudent Commercial Real
                                      payments.               status until the        Estate Loan Workouts''
                                                              credit union receives   (June 2010) and Enclosure
                                                              6 consecutive           http://www.ncua.gov.
                                                              payments under the
                                                              modified terms.
----------------------------------------------------------------------------------------------------------------

    The proposed rule requires policies governing loan workout 
practices and loan nonaccruals. The proposed rule also includes an IRPS 
as an appendix to establish NCUA's expectations and requirements 
regarding compliance. The Board seeks to ensure loan workout management 
is subject to written credit union policies and monitoring strategies, 
thereby limiting inherently ineffective workout strategies that do not 
improve loan collectability but delay loss recognition and potentially 
lead to further deterioration in the loan portfolio. The Board invites 
the public's comment on all aspects of the proposed rule and IRPS 
(Appendix).

B. Does the proposed rule and IRPS create greater restrictions than the 
current guidance?

    The proposed rule and associated IRPS reduce regulatory burden by 
eliminating the requirement to maintain a separate, mostly manual 
process for tracking TDR loans. The proposed rule does, however, 
introduce compensating controls by requiring FICUs to establish a 
written loan workout policy and formulate measuring and monitoring 
controls. It also memorializes a longstanding nonaccrual practice for 
past due loans.

[[Page 4930]]

C. Why is the period for public comment thirty days?

    As a matter of policy, NCUA believes that the public should be 
given at least sixty days to comment on a proposed regulation. See NCUA 
IRPS 87-2 (as amended by IRPS 03-2). In this case, however, the Board 
is issuing the proposed rule and IRPS with a thirty-day comment period 
to address the industry's request that NCUA clarify its expectations 
and reduce confusion and burden, particularly with regard to the 
classification and regulatory reporting for TDRs.

D. When will FICUs have to comply with the proposed rule?

    With a shortened comment period, the Board will issue a final rule 
as soon as practicable, but recognizes that FICUs will need time to 
revise existing lending policies. Furthermore, to implement these new 
requirements, certain system changes will be required for reporting 
purposes. As such, the Board intends on issuing the final rule with an 
effective date of 120 days after it is published in the Federal 
Register to require the implementation of the written lending policies 
by such date. As further discussed in the preamble, the Board plans to 
closely time its adjustments to the Call Report requirements for 
reporting TDRs, consistent with this rulemaking. The Board anticipates 
that the Call Report requirements will go into effect no later than the 
quarter ending December 31, 2012.
    The Board requests comment on the proposed effective dates for the 
policy requirements and the Call Report changes as well as any 
suggestions to lessen burden or otherwise reduce the necessary 
implementation time period.

III. Analysis of Rule Amendment and IRPS

Section 741.3, Lending Policies

    The Board proposes to amend Sec.  741.3(b)(2) to require FICUs to 
adopt policies that govern loan workout and nonaccrual practices. 
Section 741.3(b)(2) currently requires all FICUs to maintain written 
lending policies that address, at a minimum, adequate loan 
documentation, protection of security interests, determinations of 
collateral value, and evaluations of a borrower's ability to repay in 
the event of default. The existence and adequacy of written lending 
policies are critical factors in evaluating whether a FICU is operating 
in a safe and sound manner. In light of the increased demand for loan 
workouts and to ensure appropriate income recognition for loans that 
are past due by 90 days or more, the Board believes it prudent to 
require loan account management policies in the rule. The proposed rule 
establishes minimum standards to be applied consistently throughout the 
industry and serves as a tool for managing risk to NCUSIF.
    To set NCUA's supervisory expectations and assist FICUs in 
compliance with the proposed change to Sec.  741.3, the Board proposes 
to include an appendix to Part 741. The proposed appendix thoroughly 
addresses the loan workout account management and reporting standards 
FICUs must implement in order to comply with the rule. It also explains 
how FICUs are to report their data collections related to TDRs on Call 
Reports. The contents of the appendix are described in detail below.

B. Proposed Appendix C to Part 741, Interpretive Ruling and Policy 
Statement on Loan Workouts, Nonaccrual Policy, and Regulatory Reporting 
of Troubled Debt Restructured Loans

1. Written Loan Workout Policy and Monitoring Requirements
    The Board recognizes loan workouts can be used to help borrowers 
overcome temporary financial difficulties, such as loss of job, medical 
emergency, or change in family circumstances like loss of a family 
member. The Board further acknowledges that the lack of a sound workout 
policy can mask the true performance and past due status of the loan 
portfolio. Accordingly, the proposal requires the FICU board and 
management to adopt and adhere to an explicit written policy and 
standards that control the use of loan workouts, and establish controls 
to ensure the policy is consistently applied. The loan workout policy 
and practices 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 should also include aggregate program 
limits (for total workout portfolio and each type of workout) as a 
percentage of net worth. The Board proposes to use net worth, rather 
than unimpaired capital and surplus, as the means for striking this 
balance. Net worth cushions fluctuations in earnings, supports growth, 
and provides protection against insolvency. As such, the Board believes 
establishing limits tied to this measure is appropriate. The Board 
understands that not all FICUs are alike and this policy will enable 
FICUs to tailor their written policies to their own unique 
circumstances.
    Furthermore, the Board believes loan workouts should be adequately 
controlled and monitored by the board of directors and management, and 
therefore proposes the decision to re-age, extend, defer, renew, or 
rewrite a loan, like any other revision to contractual terms, be 
supported by the FICU'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.
    The policy must also define eligibility requirements (i.e. under 
what conditions the FICU will consider a loan workout), including 
establishing limits on the number of times an individual loan may be 
modified.\10\ The policy must ensure the FICU makes loan workout 
decisions based on the borrower's renewed willingness and ability to 
repay the loan. In addition, the policy must establish sound controls 
to ensure loan workout actions are appropriately structured.
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    \10\ Broad based credit union programs commonly used as a member 
benefit and implemented in a safe and sound manner limited to only 
accounts in good standing, such as Skip-a-Pay programs, are not 
intended to count toward these limits.
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    In developing a written policy, the FICU board and management may 
wish to consider similar parameters as those established in the FFIEC's 
``Uniform Retail Credit Classification and Account Management Policy'' 
(FFIEC Policy).\11\ 65 FR 36903 (June 12, 2000). The FFIEC Policy sets 
forth specific limitations on the number of times a loan can be re-aged 
(for open-end accounts) or extended, deferred, renewed or rewritten 
(for closed-end accounts).\12\ Additionally, LCU 09-CU-19, ``Evaluating 
Residential Real Estate Mortgage Loan Modification Programs,'' outlines 
policy requirements for real

[[Page 4931]]

estate modifications.\13\ Those requirements remain applicable to real 
estate loan modifications but could be adapted in part by the FICU in 
its written loan workout policy for other loans.
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    \11\ The FFIEC was established in March 1979 to prescribe 
uniform principles, standards, and report forms and to promote 
uniformity in the supervision of financial institutions. The Council 
has six voting members: a Governor of the Board of Governors of the 
Federal Reserve System designated by the Chairman of the Board, the 
Chairman of the Federal Deposit Insurance Corporation, the Chairman 
of the Board of the National Credit Union Administration, the 
Comptroller of the Currency, the Director of the Consumer Financial 
Protection Bureau, and the Chairman of the State Liaison Committee. 
The Council's activities are supported by interagency task forces 
and by an advisory State Liaison Committee, comprised of five 
representatives of state agencies that supervise financial 
institutions.
    \12\ See http://www.fdic.gov for additional information.
    \13\ See http://www.ncua.gov for additional information.
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    The Board does not intend for these minimum requirements to be an 
all inclusive list, rather they provide a basic framework within which 
to establish a sound loan workout program.
    The Board seeks comment on the proposed policies including any 
additional elements that should be added.
2. Regulatory Reporting of Workout Loans Including TDR Past Due Status
    The Board recognizes that loan workouts that qualify under GAAP as 
TDRs require special financial reporting considerations. Confusion has 
been evident throughout the credit union industry about what 
constitutes a TDR and how to report the TDR identified.
    The proposed policy mandates that the past due status of all loans 
should be calculated consistent with loan contract terms, including 
amendments made to loan terms through a formal restructure. This 
proposed revision eliminates the dual, often manual delinquency 
tracking burden on FICUs managing and reporting TDR loans, while 
instituting a nonaccrual policy on TDR loans apart from past due 
status. If the proposal is finalized, the Board intends to modify the 
Call Report instructions accordingly. As previously indicated for 
purposes of Call Report data, in determining if a loan is a TDR, it is 
the Board's view that in an economic downturn absent contrary 
supportable information workout loans are TDRs.
    Additionally, the proposed IRPS will institute revised Call Report 
data collections related to loan workouts eliminating much of the 
current data collections on the broad category ``loan modifications,'' 
focusing data collection on TDR loans. The Board will add additional 
data elements as necessary to effectively monitor and measure TDR 
activity and corresponding risk to the NCUSIF. This will assist 
national and field examination and supervision staff both to detect the 
level of activity and possible overuse of reworking a nonperforming 
loan multiple times without improving overall collectability, and will 
ensure income recognition is appropriate.
    Accordingly the Board invites public comment on its proposal to 
modify Call Report instructions to change the ``past due'' definition, 
and to revise loan modification data collections to target TDR data 
elements, as discussed.
3. Loan Nonaccrual Policy
    Generally, the NCUA has required, and it has become accepted credit 
union practice, to cease accruing interest on a loan when it becomes 90 
days or more past due. The existing approach is referenced in various 
letters and publications but currently is not memorialized or 
enforceable through any statute or regulation.\14\ The Board reaffirms 
this longstanding credit union practice by proposing that the rule and 
appended IRPS require a FICU to adopt written nonaccrual policies that 
specifically address the discontinuance of interest accrual on loans 
that are past due by 90 days or more, as well as the requirements for 
returning such loans (including member business loan workouts) to 
accrual status.
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    \14\ The policy was discussed in an obsolete version of the NCUA 
Accounting Manual for FCUs, last published in June 1995.
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Nonaccrual Status
    As proposed, the IRPS specifies when FICUs must place loans in 
nonaccrual status, including the reversal of previously accrued but 
uncollected interest, set the conditions for restoration of a 
nonaccrual loan to accrual status, and discuss the criteria under GAAP 
for Cash or Cost Recovery basis of income recognition. The Board is 
proposing that FICUs may not 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. Additionally, FICUs must place loans in nonaccrual status 
if maintained on a Cash (or Cost Recovery) basis because of 
deterioration in the financial condition of the borrower, or for which 
payment in full of principal or interest is not expected. The policy 
also addresses the treatment of cash interest payments received and 
prohibits the reversal of previously accrued, but uncollected, interest 
applicable to any loan placed in nonaccrual status. The Board believes 
this uniform policy will promote consistency and appropriate income 
recognition practices across FICUs of all sizes. The Board further 
believes this is a longstanding practice and data processing systems 
already support this nonaccrual policy. Therefore, the Board 
anticipates no more than minimal, if any, changes to credit union 
processes would be required.
Restoration to Accrual Status (Not Including Member Business Loan 
Workouts)
    The proposed IRPS sets forth specific parameters for returning a 
nonaccrual loan to accrual. A nonaccrual loan may be returned to 
accrual status 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 is plausibly assured of repayment of the remaining 
contractual principal and interest within a reasonable period;
     When it otherwise becomes well secured and in the process 
of collection; or
     The asset is a purchased impaired loan and it meets the 
criteria under GAAP for accrual of income under the interest method 
specified therein.
    In restoring loans to accrual status, if any interest payments 
received while the loan was in nonaccrual status were applied to reduce 
the recorded investment in the loan the application of these payments 
to the loan's recorded investment must not be reversed (and interest 
income must not be credited). Likewise, accrued but uncollected 
interest reversed or charged off at the point the loan was placed on 
nonaccrual status cannot be restored to accrual; it can only be 
recognized as income if collected in cash or cash equivalents from the 
member.
    The Board believes these policies surrounding restoration of loans 
to accrual status are a necessary supplement to the nonaccrual 
requirements previously discussed and will ensure appropriate and 
consistent income recognition in credit unions.
Restoration to Accrual Status on Member Business Loan Workouts
    The Board recognizes there are unique circumstances governing the 
restoration of accrual for member business loan workouts and has set 
forth a separate policy in the proposal. This policy is largely derived 
from the ``Interagency Policy Statement on Prudent Commercial Real 
Estate Loan Workouts'' that NCUA and the other financial regulators 
issued on October 30, 2009.\15\ The proposed IRPS requires a formally 
restructured member business loan workout to remain in nonaccrual 
status until the FICU can document a current credit evaluation of the 
borrower's financial condition and prospects for repayment under the 
revised terms. The evaluation must include consideration

[[Page 4932]]

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.
---------------------------------------------------------------------------

    \15\ See Interagency Policy Statement on Prudent Commercial Real 
Estate Loan Workouts (October 30, 2009) transmitted by Letter to 
Credit Unions No. 10-CU-07, and available at http://www.ncua.gov.
---------------------------------------------------------------------------

    A sustained period of repayment performance would be a minimum of 
six consecutive payments and would involve payments of cash or cash 
equivalents. In returning the member business workout loan to accrual 
status, sustained historical repayment performance for a reasonable 
time prior to the restructuring may be taken into account. Such a 
restructuring must improve the collectability of the loan in accordance 
with a reasonable repayment schedule and does not relieve the FICU from 
the responsibility to promptly charge off all identified losses. An 
example is included in the IRPS to illustrate the application of the 
six consecutive month sustained repayment history. The Board has 
included tables setting forth nonaccrual criteria and restoration to 
accrual in the IRPS.
4. Glossary
    The final section of the IRPS is a glossary of terms used 
throughout.
    Accordingly, the Board invites public comment on its proposal to 
require FICUs to adopt loan nonaccrual policies incorporating more 
specifically the GAAP elements of the Cash and Cost Recovery bases of 
income recognition in relation to nonperforming loan workouts. 
Additionally, the Board invites comment on its proposed policy on the 
restoration of nonaccrual loans to accrual under certain conditions. 
The Board also seeks comment on its additional parameters for restoring 
member business loan workouts to accrual status.
    To assist commenters in understanding existing agency guidance, the 
following illustration is provided:

  Summary of Source Guidance Related to Lending and Loan Modifications
------------------------------------------------------------------------
    Source of supervisory                              Member business
          guidance              Consumer lending           lending
------------------------------------------------------------------------
Existing Recent Supervisory   Letter to Credit      Letter to Credit
 Guidance on Lending and/or    Union 11-CU-01,       Unions 10-CU-07,
 Loan Modifications.           Residential           Commercial Real
                               Mortgage              Estate Loan
                               Foreclosure           Workouts,
                               Concerns, (January    transmitting
                               2011) http://         Interagency Policy
                               www.ncua.gov.         Statement on
                              Letter to Credit       Prudent Commercial
                               Unions 09-CU-19,      Real Estate Loan
                               Evaluating            Workouts, (June
                               Residential Real      2010), and
                               Estate Mortgage       Enclosure http://
                               Loan Modification     www.ncua.gov.
                               Programs,            Letter to Credit
                               (September 2009)      Unions 10-CU-02,
                               http://www.ncua.gov.  Current Risks in
                              Federal Financial      Business Lending
                               Regulatory Agencies   and Sound Risk
                               Issue Statement In    Management
                               Support of the        Practices,
                               ``Making Home         (February 2010)
                               Affordable'' Loan     http://
                               Modification          www.ncua.gov.
                               Program,'' (March
                               2009) http://www.ncua.gov.
                              Statement on Loss
                               Mitigation
                               Strategies for
                               Servicers of
                               Residential
                               Mortgages,
                               (September 2007)
                               http://www.ncua.gov.
Written Policy Requirement    Proposed policy is    Proposed policy is
 on Frequency of               in this Proposed      in this Proposed
 Modifications.                IRPS 12-1.            IRPS 12-1, and
                                                     Letter to Credit
                                                     Unions 10-CU-07,
                                                     Commercial Real
                                                     Estate Loan
                                                     Workouts,
                                                     transmitting
                                                     Interagency Policy
                                                     Statement on
                                                     Prudent Commercial
                                                     Real Estate Loan
                                                     Workouts, (June
                                                     2010) and Enclosure
                                                     http://www.ncua.gov.
Nonaccrual..................  Proposed policy is in this Proposed IRPS
                               12-1.
Delinquency.................  Change to existing policy in this Proposed
                               IRPS 12-1. For all loans including
                               workout loans, past due status is based
                               on loan contract terms.
Allowance for Loan and Lease  IRPS 02-3, Allowance for Loan and Lease
 Losses.                       Losses Methodologies and Documentation
                               for Federally-Insured Credit Unions (May
                               2002), http://www.ncua.gov.
                              2006 Interagency ALLL Policy Statement
                               transmitted by Accounting Bulletin 06-1
                               (December 2006), http://www.ncua.gov.
Charge-offs.................  Letter to Credit Unions No. 03-CU-01, Loan
                               Charge-off Guidance (January 2003), and
                               its Enclosure, http://www.ncua.gov.
------------------------------------------------------------------------

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact agency rulemaking may have 
on a substantial number of small credit unions, defined as those under 
ten million dollars in assets. This proposed rule tightens loan account 
management processes that should already be in place in FICUs. While 
FICUs are required to have policies that address loan management 
protocols, the proposed rule and IRPS set additional parameters that 
are consistent with existing best practices and federal banking 
regulators' policies. NCUA has determined this proposed rule will not 
have a significant impact on a substantial number of small credit 
unions so NCUA is not required to conduct a Regulatory Flexibility 
Analysis.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part 
1320. For purposes of the PRA, a paperwork burden may take the form of 
either a reporting or a recordkeeping requirement, both referred to as 
information collections.
    The proposed rule contains an information collection in the form of 
a written policy requirement. Any FICU making loan workout arrangements 
that assist borrowers must have a written policy to govern this 
activity. As required by the PRA, NCUA is submitting a copy of this 
proposed IRPS to the Office of Management and Budget (OMB) for its 
review and approval. Persons interested in submitting comments with 
respect to the information collection aspects of the proposed rule 
should submit them to OMB at the address noted below.
    Based on NCUA's experience, FICUs already maintain written loan 
policies, which often include minimum workout loan requirements. As 
such, they will

[[Page 4933]]

only need to modify current policies to include any additional 
parameters established in the proposed rule. It is therefore NCUA's 
view that implementing this type of policy will create minimum burden 
to credit unions. The parameters established within the proposed rule 
and IRPS are usual and customary operating practices of a prudent 
financial institution. NCUA estimates it should take a FICU an average 
of 8 hours to modify current policies to comply with the parameters set 
forth in the proposed IRPS. Therefore, the total initial burden imposed 
to 7,250 FICUs for modifying the policies is approximately 58,000 
hours. NCUA further estimates a FICU spends on average 15 minutes per 
month manually calculating and reporting past due status on each TDR 
loan. This policy eliminates this requirement. Per the September 30, 
2011, Call Report, FICUs have 150,453 TDR loans outstanding. 
Eliminating this reporting requirement therefore results in an annual 
savings of 451,359 hours. Thus, on net, this policy results in a 
substantial hours (393,359 annually) reduction of regulatory burden. 
NCUA is specifically interested in receiving comments regarding 
estimates of reduced burden relating to the proposed changes on 
regulatory reporting of TDR loans.
    NCUA considers comments by the public on this proposed collection 
of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of the NCUA's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are required to respond, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
collection techniques or other forms of information technology; e.g., 
permitting electronic submission of responses.
    The PRA requires OMB to make a decision concerning the collection 
of information contained in the proposed rule and IRPS between 30 and 
60 days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This coincides with 
the 30-day public comment period on the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, 725 17th Street, NW., Washington, DC 20503; 
Attention: NCUA Desk Officer, with a copy to Mary Rupp, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on state and local 
interests. In adherence to fundamental federalism principles, NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This proposed rule 
applies to all FICUs but does not have substantial direct effect on the 
states, on the relationship between the national government and the 
states, or on the distribution of power and responsibilities among the 
various levels of government. NCUA has determined that this proposed 
rule does not constitute a policy that has federalism implications for 
purposes of the executive order.

D. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this proposed rule will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

E. Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects in 12 CFR Part 741

    Credit unions, Reporting and recordkeeping requirements.


    By the National Credit Union Administration Board on January 26, 
2012.
Mary F. Rupp,
Secretary of the Board.

    For the reasons discussed above, NCUA proposes to amend 12 CFR part 
741 as follows:

PART 741--REQUIREMENTS FOR INSURANCE

    1. The authority citation for part 741 continues to read:

    Authority: 12 U.S.C. 1757, 1766(a), 1781-1790 and 1790d; 31 
U.S.C. 3717.

    2. In Sec.  741.3, revise paragraph (b)(2) to read as follows:


Sec.  741.3  Criteria

    (b) Financial condition and policies. * * *
    (2) The existence of written lending policies, including adequate 
documentation of secured loans and the protection of security interests 
by recording, bond, insurance or other adequate means, adequate 
determination of the financial capacity of borrowers and co-makers for 
repayment of the loan, adequate determination of value of security on 
loans to ascertain that said security is adequate to repay the loan in 
the event of default, loan workout arrangements, and nonaccrual 
standards that include the discontinuance of interest accrual on loans 
past due by 90 days or more and requirements for returning such loans, 
including member business loans, to accrual status.
    3. Amend Part 741 by adding Appendix C to read as follows:

Appendix C to Part 741--Interpretive Ruling and Policy Statement on 
Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled 
Debt Restructured Loans

    This Interpretive Ruling and Policy Statement (IRPS) establishes 
requirements for the management of loan workout \1\ arrangements, 
loan nonaccruals, and regulatory reporting of troubled debt 
restructured loans (herein after referred to as TDR or TDRs).
---------------------------------------------------------------------------

    \1\ Terms defined in the Glossary will be italicized on their 
first use in the body of this guidance.
---------------------------------------------------------------------------

    This IRPS applies to all federally insured credit unions.
    Under this IRPS, TDR loans are as defined in generally accepted 
accounting principles (GAAP) and the Board does not intend through 
this policy to change the Financial Accounting Standards Board's 
(FASB) definition of TDR in any way. In addition to existing agency 
policy, this IRPS sets NCUA's supervisory expectations governing 
loan workout policies and practices and loan accruals.

Written Loan Workout Policy and Monitoring Requirements \2\
---------------------------------------------------------------------------

    \2\ For additional guidance on member business lending 
extension, deferral, renewal, and rewrite policies, see Interagency 
Policy Statement on Prudent Commercial Real Estate Loan Workouts 
(October 30, 2009) transmitted by Letter to Credit Unions No. 10-CU-
07, and available at http://www.ncua.gov.
---------------------------------------------------------------------------

    For purposes of this policy statement, types of workout loans to 
borrowers in

[[Page 4934]]

financial difficulties include re-agings, extensions, deferrals, 
renewals, or rewrites. See the Glossary entry on ``workouts'' for 
further descriptions of each term. Borrower retention programs or 
new loans are not encompassed within this policy nor considered by 
the Board to be workout loans.
    Loan workouts can be used to help borrowers overcome temporary 
financial difficulties, such as loss of job, medical emergency, or 
change in family circumstances like loss of a family member. Loan 
workout arrangements should consider and balance the best interests 
of both the borrower and the credit union.
    The lack of a sound written policy on workouts can mask the true 
performance and past due status of the loan portfolio. Accordingly, 
the credit union board and management must adopt and adhere to an 
explicit written policy and standards that control the use of loan 
workouts, and establish controls to ensure the policy is 
consistently applied. The loan workout policy and practices should 
be commensurate with each credit union's size and complexity, must 
be in line with the credit union's broader risk mitigation 
strategies, and must include aggregate program limits (for total 
workout portfolio and each type of workout) as a percentage of net 
worth. The policy must define eligibility requirements (i.e. under 
what conditions the credit union will consider a loan workout), 
including establishing limits on the number of times an individual 
loan may be modified.\3\ The policy must also ensure credit unions 
make loan workout decisions based on the borrower's renewed 
willingness and ability to repay the loan. In addition, the policy 
must establish sound controls to ensure loan workout actions are 
appropriately structured.\4\ In no event should the credit union 
authorize additional advances to finance unpaid interest and fees. 
For loan workouts granted, the credit union must document the 
determination that the borrower is willing and able to repay the 
loan.
---------------------------------------------------------------------------

    \3\ Broad based credit union programs commonly used as a member 
benefit and implemented in a safe and sound manner limited to only 
accounts in good standing, such as Skip-a-Pay programs, are not 
intended to count toward these limits.
    \4\ In developing a written policy, the credit union board and 
management may wish to consider similar parameters as those 
established in the FFIEC's ``Uniform Retail Credit Classification 
and Account Management Policy'' (FFIEC Policy). 65 FR 36903 (June 
12, 2000). The FFIEC Policy sets forth specific limitations on the 
number of times a loan can be re-aged (for open-end accounts) or 
extended, deferred, renewed or rewritten (for closed-end accounts). 
Additionally, NCUA Letter to Credit Unions (LCU) 09-CU-19, 
``Evaluating Residential Real Estate Mortgage Loan Modification 
Programs,'' outlines policy requirements for real estate 
modifications. Those requirements remain applicable to real estate 
loan modifications but could be adapted in part by the credit union 
in their written loan workout policy for other loans.
---------------------------------------------------------------------------

    Management must ensure that comprehensive and effective risk 
management and internal controls are established and maintained so 
that loan workouts can be adequately controlled and monitored by the 
credit union's board of directors and management, to provide for 
timely recognition of losses,\5\ and to permit review by examiners. 
To be effective, management information systems need to track the 
principal reductions and charge-off history of loans in workout 
programs by type of program. Any decision to re-age, extend, defer, 
renew, or rewrite a loan, like any other revision to contractual 
terms, needs 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. Documentation normally shows that the 
credit union's personnel communicated with the borrower, the 
borrower agreed to pay the loan in full under any new terms, and the 
borrower has the ability to repay the loan under any new terms.
---------------------------------------------------------------------------

    \5\ Refer to NCUA guidance on charge-offs set forth in LCU 03-
CU-01, ``Loan Charge-off Guidance,'' dated January 2003. Examiners 
will require that a reasonable written charge-off policy is in place 
and that it is consistently applied. Additionally, credit unions 
need to adjust historical loss factors when calculating ALLL needs 
for pooled loans to account for any loans with protracted charge-off 
timeframes (e.g., 12 months or greater).
---------------------------------------------------------------------------

Regulatory Reporting of Workout Loans Including TDR Past Due Status

    The past due status of all loans will be calculated consistent 
with loan contract terms, including amendments made to loan terms 
through a formal restructure. Credit unions will report delinquency 
on the Call Report consistent with this policy.\6\
---------------------------------------------------------------------------

    \6\ Subsequent Call Reports and accompanying instructions will 
reflect this policy, including focusing data collection on loans 
meeting the definition of TDR under GAAP. Credit unions should also 
refer to the recently revised standard from the FASB, Accounting 
Standards Update No. 2011-02 (April 2011) to the FASB Accounting 
Standards Codification entitled, Receivables (Topic 310), ``A 
Creditor's Determination of Whether a Restructuring is a Troubled 
Debt Restructuring.'' This clarified the definition of a TDR, which 
has the practical effect in the current economic environment to 
broaden loan workouts that constitute a TDR. This standard is 
effective for annual periods ending on or after December 15, 2012.
---------------------------------------------------------------------------

Loan Nonaccrual Policy

    Credit unions must ensure appropriate income recognition by 
placing loans in nonaccrual when conditions as specified below 
exist, reversing previously accrued but uncollected interest, 
complying with the criteria under GAAP for Cash or Cost Recovery 
basis of income recognition, and following the specifications below 
regarding restoration of a nonaccrual loan to accrual status. This 
policy on loan accrual is consistent with longstanding credit union 
industry practice as implemented by the NCUA over the last several 
decades. The balance of the policy relates to member business loan 
workouts and is similar to the FFIEC policies adopted by the federal 
banking agencies \7\ as set forth in the FFIEC Call Report for 
banking institutions and its instructions.\8\
---------------------------------------------------------------------------

    \7\ The federal banking agencies are the Board of Governors of 
the Federal Reserve System, the Federal Deposit Insurance 
Corporation, and the Office of the Comptroller of the Currency.
    \8\ FFIEC Report of Condition and Income Forms and User Guides, 
Updated September 2011, http://www.fdic.gov.
---------------------------------------------------------------------------

Nonaccrual Status

    Credit unions may not accrue interest \9\ 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.\10\ Additionally, loans will be placed in nonaccrual 
status if maintained on a Cash basis (or Cost Recovery basis) 
because of deterioration in the financial condition of the borrower, 
or for which payment in full of principal or interest is not 
expected. For purposes of applying the ``well secured'' and ``in 
process of collection'' test for nonaccrual status listed above, the 
date on which a loan reaches nonaccrual status is determined by its 
contractual terms.
---------------------------------------------------------------------------

    \9\ Nonaccrual of interest also includes the amortization of 
deferred net loan fees or costs, or the accretion of discount. 
Nonaccrual of interest on loans past due 90 days or more is a 
longstanding agency policy and credit union practice.
    \10\ A purchased credit impaired loan asset need not be placed 
in nonaccrual status as long as the criteria for accrual of income 
under the interest method in GAAP is met. Also, the accrual of 
interest on workout loans is covered in a separate section of this 
IRPS later in the policy statement.
---------------------------------------------------------------------------

    While a loan is in nonaccrual status, some or all of the cash 
interest payments received may be treated as interest income on a 
cash basis as long as the remaining recorded investment in the loan 
(i.e., after charge-off of identified losses, if any) is deemed to 
be fully collectable. The reversal of previously accrued, but 
uncollected, interest applicable to any loan placed in nonaccrual 
status must be handled in accordance with GAAP.\11\ Where assets are 
collectable over an extended period of time and, because of the 
terms of the transactions or other conditions, there is no 
reasonable basis for estimating the degree of collectability--when 
such circumstances exist, and as long as they exist--consistent with 
GAAP the Cost Recovery Method of accounting must be used.\12\ Use of 
the Cash

[[Page 4935]]

or Cost Recovery basis for these loans and the statement on 
reversing previous accrued interest is the practical implementation 
of relevant accounting principles.
---------------------------------------------------------------------------

    \11\ Acceptable accounting treatment includes a reversal of all 
previously accrued, but uncollected, interest applicable to loans 
placed in a nonaccrual status against appropriate income and balance 
sheet accounts. For example, one acceptable method of accounting for 
such uncollected interest on a loan placed in nonaccrual status is: 
(1) To reverse all of the unpaid interest by crediting the ``accrued 
interest receivable'' account on the balance sheet, (2) to reverse 
the uncollected interest that has been accrued during the calendar 
year-to-date by debiting the appropriate ``interest and fee income 
on loans'' account on the income statement, and (3) to reverse any 
uncollected interest that had been accrued during previous calendar 
years by debiting the ``allowance for loan and lease losses'' 
account on the balance sheet. The use of this method presumes that 
credit union management's additions to the allowance through charges 
to the ``provision for loan and lease losses'' on the income 
statement have been based on an evaluation of the collectability of 
the loan and lease portfolios and the ``accrued interest 
receivable'' account.
    \12\ When a purchased impaired loan or debt security that is 
accounted for in accordance with ASC Subtopic 310-30, ``Receivables-
Loans and Debt Securities Acquired with Deteriorated Credit 
Quality,'' has been placed on nonaccrual status, the cost recovery 
method should be used, when appropriate.
---------------------------------------------------------------------------

Restoration to Accrual Status (Not Including Member Business Loan 
Workouts)

    A nonaccrual loan may be restored to accrual status when:
     Its past due status is less than 90 days, GAAP does not 
require it to be maintained on the Cash or Cost Recovery bases, and 
the credit union is plausibly assured of repayment of the remaining 
contractual principal and interest within a reasonable period;
     When it otherwise becomes both well secured and in the 
process of collection; or
     The asset is a purchased impaired loan and it meets the 
criteria under GAAP for accrual of income under the interest method 
specified therein.
    In restoring loans to accrual status, if any interest payments 
received while the loan was in nonaccrual status were applied to 
reduce the recorded investment in the loan the application of these 
payments to the loan's recorded investment must not be reversed (and 
interest income must not be credited). Likewise, accrued but 
uncollected interest reversed or charged-off at the point the loan 
was placed on nonaccrual status cannot be restored to accrual; it 
can only be recognized as income if collected in cash or cash 
equivalents from the member.

Restoration to Accrual Status on Member Business Loan Workouts \13\
---------------------------------------------------------------------------

    \13\ This policy is derived from the ``Interagency Policy 
Statement on Prudent Commercial Real Estate Loan Workouts'' NCUA and 
the other financial regulators issued on October 30, 2009.
---------------------------------------------------------------------------

    A formally restructured member business loan workout need not be 
maintained in nonaccrual status, provided the restructuring and any 
charge-off taken on the loan are supported by a current, well 
documented credit evaluation of the borrower's financial condition 
and prospects for repayment under the revised terms. Otherwise, the 
restructured loan must remain in nonaccrual status. The evaluation 
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. A sustained period of 
repayment performance would be a minimum of six consecutive payments 
and would involve payments of cash or cash equivalents. In returning 
the member business workout loan to accrual status, sustained 
historical repayment performance for a reasonable time prior to the 
restructuring may be taken into account. Such a restructuring must 
improve the collectability of the loan in accordance with a 
reasonable repayment schedule and does not relieve the credit union 
from the responsibility to promptly charge off all identified 
losses.
    For example, if the original contractually due monthly payment 
was $1,500, and the borrower's payment was lowered to $1,000 through 
formal member business loan restructure, then based on the following 
schedule of repayment performance (in the first row) the ``sustained 
historical repayment performance for a reasonable time prior to the 
restructuring'' would encompass five of the pre-workout consecutive 
payments that were at least $1,000; so, in total, the six 
consecutive repayment burden would be met by the first month post 
workout. In the second row, only one of the pre-workout payments 
would count toward the six consecutive repayment requirement, so the 
loan would remain on nonaccrual for at least five post-workout 
consecutive payments consistent with restructured terms.

                      Table 1--Six Consecutive Periods Sustained Repayment Performance \14\
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                              Post workout
----------------------------------------------------------------------------------------------------------------
                                                                           Month 1       Month 2       Month 3
----------------------------------------------------------------------------------------------------------------
 \1\ $1,500     \2\ $1,200     \3\ $1,200    \4\ $1,000    \5\ $1,000    \6\ $1,000        $1,000        $1,000
      1,500          1,200            900           875     \1\ 1,000     \2\ 1,000     \3\ 1,000     \4\ 1,000
----------------------------------------------------------------------------------------------------------------

    After a formal restructure of a member business loan, if the 
restructured loan has been returned to accrual status, the loan 
otherwise remains subject to the nonaccrual standards of this 
policy.
---------------------------------------------------------------------------

    \14\ Number prior to monthly payment amounts indicate payments 
received towards the six consecutive payment requirement as 
explained in the example above.
---------------------------------------------------------------------------

    The following tables summarize nonaccrual and restoration to 
accrual requirements previously discussed:

                      Table 2--Nonaccrual Criteria
------------------------------------------------------------------------
                                                         Additional
           Action             Condition identified      consideration
------------------------------------------------------------------------
Nonaccrual on All Loans.....  90 days or more past  See Glossary
                               due unless loan is    descriptors for
                               both well secured     ``well secured''
                               and in the process    and ``in the
                               of collection; or.    process of
                                                     collection.''
                              If the loan must be   Consult GAAP for
                               maintained on the     Cash Basis and Cost
                               Cash or Cost          Recovery income
                               Recovery basis        recognition
                               because there is a    guidance. See also
                               deterioration in      Glossary
                               the financial         Descriptors.
                               condition of the
                               borrower, or for
                               which payment in
                               full of principal
                               or interest is not
                               expected.
Nonaccrual on Member          Continue on           See Table 3--Restore
 Business Loan Workouts.       nonaccrual at         to Accrual.
                               workout point and
                               until restore to
                               accrual criteria
                               are met.
------------------------------------------------------------------------


[[Page 4936]]


                       Table 3--Restore to Accrual
------------------------------------------------------------------------
                                                         Additional
           Action             Condition identified      consideration
------------------------------------------------------------------------
Restore to Accrual on Loans   When the loan is      See Glossary
 (not including Member         past due less than    descriptors for
 Business Loan Workouts).      90 days, GAAP does    ``well secured''
                               not require it to     and ``in the
                               be maintained on      process of
                               the Cash or Cost      collection.''
                               Recovery basis, and  Interest payments
                               the credit union is   received while the
                               plausibly assured     loan was in
                               of repayment of the   nonaccrual status
                               remaining             and applied to
                               contractual           reduce the recorded
                               principal and         investment in the
                               interest within a     loan must not be
                               reasonable period.    reversed and income
                              When it otherwise      credited. Likewise,
                               becomes both ``well   accrued but
                               secured'' and ``in    uncollected
                               the process of        interest reversed
                               collection''; or.     or charged-off at
                              The asset is a         the point the loan
                               purchased impaired    was placed on
                               loan and it meets     nonaccrual status
                               the criteria under    cannot be restored
                               GAAP for accrual of   to accrual.
                               income under the
                               interest method.
Restore Accrual on Member     Formal restructure    The evaluation must
 Business Loan Workouts.       with a current,       include
                               well documented       consideration of
                               credit evaluation     the borrower's
                               of the borrower's     sustained
                               financial condition   historical
                               and prospects for     repayment
                               repayment under the   performance for a
                               revised terms.        minimum of six
                                                     consecutive
                                                     payments. In
                                                     returning the loan
                                                     to accrual status,
                                                     sustained
                                                     historical
                                                     repayment
                                                     performance for a
                                                     reasonable time
                                                     prior to the
                                                     restructuring may
                                                     be taken into
                                                     account.
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Glossary\15\

    ``Cash Basis'' method of income recognition is set forth in GAAP 
and means while a loan is in nonaccrual status, some or all of the 
cash interest payments received may be treated as interest income on 
a cash basis as long as the remaining recorded investment in the 
loan (i.e., after charge-off of identified losses, if any) is deemed 
to be fully collectible.\16\
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    \15\ Terms defined in the Glossary will be italicized on their 
first use in the body of this guidance.
    \16\ Acceptable accounting practices include: (1) allocating 
contractual interest payments among interest income, reduction of 
the recorded investment in the asset, and recovery of prior charge-
offs. If this method is used, the amount of income that is 
recognized would be equal to that which would have been accrued on 
the loan's remaining recorded investment at the contractual rate; 
and, (2) accounting for the contractual interest in its entirety 
either as income, reduction of the recorded investment in the asset, 
or recovery of prior charge-offs, depending on the condition of the 
asset, consistent with its accounting policies for other financial 
reporting purposes.
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    ``Charge-off'' means a direct reduction (credit) to the carrying 
amount of a loan carried at amortized cost resulting from 
uncollectability with a corresponding reduction (debit) of the ALLL. 
Recoveries of loans previously charged off should be recorded when 
received.
    ``Cost Recovery'' method of income recognition means equal 
amounts of revenue and expense are recognized as collections are 
made until all costs have been recovered, postponing any recognition 
of profit until that time.\17\
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    \17\ FASB Accounting Standards Codification (ASC) 605-10-25-4, 
``Revenue Recognition, Cost Recovery.''
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    ``Generally accepted accounting principles (GAAP)'' means 
official pronouncements of the FASB as memorialized in the FASB 
Accounting Standards Codification[reg] as the source of 
authoritative principles and standards recognized to be applied in 
the preparation of financial statements by federally-insured credit 
unions in the United States with assets of $10 million or more.
    ``In the process of collection'' means collection of the loan is 
proceeding in due course either: (1) Through legal action, including 
judgment enforcement procedures, or (2) in appropriate 
circumstances, through collection efforts not involving legal action 
which are reasonably expected to result in repayment of the debt or 
in its restoration to a current status in the near future, i.e., 
generally within the next 90 days.
    ``Member Business Loan'' is defined consistent with Section 
723.1 of NCUA's Member Business Loan Rule, 12 CFR 723.1.
    ``New Loan'' means the terms of the revised loan are at least as 
favorable to the credit union (i.e., terms are market-based, and 
profit driven) as the terms for comparable loans to other customers 
with similar collection risks who are not refinancing or 
restructuring a loan with the credit union, and the revisions to the 
original debt are more than minor.
    ``Past Due'' means a loan is determined to be delinquent in 
relation to its contractual repayment terms including formal 
restructures, and must consider the time value of money. Credit 
unions may use the following method to recognize partial payments on 
``consumer credit,'''' i.e., credit extended to individuals for 
household, family, and other personal expenditures, including credit 
cards, and loans to individuals secured by their personal residence, 
including home equity and home improvement loans. A payment 
equivalent to 90 percent or more of the contractual payment may be 
considered a full payment in computing past due status.
    ``Recorded Investment in a Loan'' means the loan balance 
adjusted for any unamortized premium or discount and unamortized 
loan fees or costs, less any amount previously charged off, plus 
recorded accrued interest.
    ``Troubled Debt Restructuring'' is as defined in GAAP and means 
a restructuring in which a credit union, for economic or legal 
reasons related to a member borrower's financial difficulties, 
grants a concession to the borrower that it would not otherwise 
consider.\18\ The restructuring of a loan may include, but is not 
necessarily limited to: (1) the transfer from the borrower to the 
credit union of real estate, receivables from third parties, other 
assets, or an equity interest in the borrower in full or partial 
satisfaction of the loan, (2) a modification of the loan terms, such 
as a reduction of the stated interest rate, principal, or accrued 
interest or an extension of the maturity date at a stated interest 
rate lower than the current market rate for new debt with similar 
risk, or (3) a combination of the above. A loan extended or renewed 
at a stated interest rate equal to the current market interest rate 
for new debt with similar risk is not to be reported as a 
restructured troubled loan.
---------------------------------------------------------------------------

    \18\ FASB ASC 310-40, ``Troubled Debt Restructuring by 
Creditors.''
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    ``Well secured'' means the loan is collateralized by: (1) A 
perfected security interest in, or pledges of, real or personal 
property, including securities with an estimable value, less cost to 
sell, sufficient to recover the recorded investment in the loan, as 
well as a reasonable return on that amount, or (2) by the guarantee 
of a financially responsible party.
    ``Workout Loan'' means a loan to a borrower in financial 
difficulty that has been formally restructured so as to be 
reasonably assured of repayment (of principal and interest) and of 
performance according to its restructured terms. A workout loan 
typically involves a re-aging, extension, deferral, renewal, or 
rewrite of a loan.\19\ For purposes of this policy statement, 
workouts do not

[[Page 4937]]

include loans made to market rates and terms such as refinances, 
borrower retention actions, or new loans.\20\

    \19\ ``Re-Age'' means returning a past due account to current 
status without collecting the total amount of principal, interest, 
and fees that are contractually due.
    ``Extension'' means extending monthly payments on a closed-end 
loan and rolling back the maturity by the number of months extended. 
The account is shown current upon granting the extension. If 
extension fees are assessed, they should be collected at the time of 
the extension and not added to the balance of the loan.
    ``Deferral'' means deferring a contractually due payment on a 
closed-end loan without affecting the other terms, including 
maturity, of the loan. The account is shown current upon granting 
the deferral.
    ``Renewal'' means underwriting a matured, closed-end loan 
generally at its outstanding principal amount and on similar terms.
    ``Rewrite'' means significantly changing the terms of an 
existing loan, including payment amounts, interest rates, 
amortization schedules, or its final maturity.
    \20\ There may be instances where a workout loan is not a TDR 
even though the borrower is experiencing financial hardship. For 
example, a workout loan would not be a TDR if the fair value of cash 
or other assets accepted by a credit union from a borrower in full 
satisfaction of its receivable is at least equal to the credit 
union's recorded investment in the loan, e.g., due to charge-offs.

[FR Doc. 2012-2206 Filed 1-31-12; 8:45 am]
BILLING CODE 7535-01-P