Credit unions by and large have been seen as the good guys in the ongoing housing finance crisis. In general, more conservative underwriting prevented most credit unions from making the mortgage loans that were most likely to wind up delinquent. Further, when credit union loans have become delinquent, CUs have generally been better positioned to modify them to help out their struggling members, particularly when they have not sold the loans or, if they did sell them, they retained the servicing.
But some CU executives charge that an NCUA policy on how credit unions must track modified loans actually increases their paperwork burden so much that it can lead them to decide on foreclosures over modification in some circumstances.
The NCUA's policy on troubled debt restructuring is meant to keep an eye on modified or restructured loans to make sure that borrowers who had trouble making previous loan payments are able to make the new loan payments. CU executives acknowledge that such tracking needs to take place. But they contend that the way NCUA requires them to track the loans both increases their burden and needlessly hurts borrowers seeking to repair damaged credit ratings.
The biggest problem with the agency's TDR tracking policy is that it requires credit unions to track the restructured loans as delinquent, even though the restructuring effectively restarts the loan and the member remains current on new loan payments.
This creates a circumstance at many credit unions where a loan can and, the executives advocate, should be considered current in every way except that the NCUA considers it delinquent. This also creates a level of frustration that many credit unions have taken to their leagues and government relations firms.
“The regulatory treatment of TDRs is one of the most common complaints a lot of my clients have in an era when there seems to be a number of regulatory complaints,” said former NCUA Chairman Dennis Dollar, founder and CEO of Dollar and Associates, a government relations firm specializing in credit union issues.
“NCUA is right to require additional credit union scrutiny on the performance of TDRs because these are members requiring loan term adjustments in order to get out of a hole, but the complaints seem to be that credit unions feel the NCUA's current reporting regime goes beyond what GAAP requires and is viewed by credit unions as somewhat arbitrary at six months required delinquency status regardless of the member's payment status,” Dollar added.
Credit unions have pointed out the delinquency reporting policy both disadvantages the borrower with credit reporting agencies and makes the credit union appear as though it has more delinquent loans than it does. Further, since the modified loans are carried as delinquent, they almost always have to be tracked manually. That takes more staff time and resources than other loans, which can be tracked with automated systems.
“You wouldn't think that the line between foreclosing and modifying would be so narrow, but it occasionally is,” said Karen Church, CEO of the 45,000-member ELGA Credit Union, Burton Mich..
The $275 million credit union has 20 modified first mortgage loans with a collective balance of just under $3 million. ELGA lists 36 foreclosed properties worth just over $3 million on its most recent call report.
Like almost all other credit unions with modified loans on their books, ELGA has no automated way to track their performance and must track them by hand, a time-consuming and laborious process. That can cause the credit union to hesitate about making a modification if it believes there is a chance that the borrower will not be able to make the payments on the new loan, Church said.
Church said she also sympathizes with borrowers who, some with real challenges, managed to make their payments on their restructured loans but whose loans are still regarded as delinquent.
Michael Poulos, CEO of Michigan First CU, said he agreed with Church's concerns and added one more. Michigan First is rated four stars by Bauer Financial, a ratings agency that rates both banks and credit unions, and carrying the restructured loans as delinquent makes the CU look worse off than it is. The 83,000-member, $644 million CU had 26 modified first mortgage loans on its most recent call report worth $2.6 million. The CU also had 45 properties worth $1.6 million on its report as foreclosed.
“The bottom line is that reporting this way is not required by GAAP, doesn't help us, doesn't help the member and in fact makes the situation worse,” he said.
Both Church and Poulos pointed out that the stated goal of the Obama administration is to seek out policies that help credit unions help struggling members, not make that more difficult.
The two CEOs and Dollar pointed out that there are several different ways the agency could still track the modified loans with characterizing them as delinquent when they are not.
For example, NCUA could require the loans to be reported elsewhere on the call report, rather than as delinquency. Or it could reduce the six-month categorization to 60 or 90 days.
Critics were heartened earlier this month when NCUA Board Chairman Debbie Matz indicated the agency was aware of their concerns and would review the policy.
“NCUA supports credit union efforts to find creative solutions for members who need loan modifications to stay in their homes,” said Matz. “As part of our efforts, the NCUA Board will be reviewing our current policy on troubled debt restructuring in the near future. NCUA is seeking solutions that would better assist credit unions which are working diligently to provide members with alternatives to foreclosure. Of course, any solutions must be consistent with GAAP and NCUA’s mission to protect credit union safety and soundness.”
Outgoing board member Gigi Hyland also brought up the policy when she spoke recently before the American Institute of Certified Public Accountants National Conference on Credit Unions in Orlando, Fla.
“One of the issues that continues to vex credit unions and accounting practitioners is the regulatory reporting of TDRs,” Hyland told the 450 meeting attendees. She alerted attendees to the webinar she hosted in February 2011 to address this issue, and she also indicated that the agency is in the process of reviewing its TDR regulatory reporting guidance to provide clearer direction on loan rewrites and modification frequency standards.
A spokesman for the agency confirmed the review has begun.