Final rules passed at the NCUA board meeting May 24 include theextension of regulatory flexibility standards to all credit unions, and newrules for troubled debt restructuring that will require written loanworkout and nonaccrual policies.

Despite the new written policy requirements, which were opposedby trade organizations, credit unions scored a win in that the pastdue status of TDRs will now be calculated consistently with loancontract terms, rather than requiring past due status to bereported until six consecutive on-time payments have been made. Thenew reporting requirements will go into effect June 30.

Credit unions will also be pleased to learn that the NCUAremoved the requirement to manually track TDRs. Chairman DebbieMatz said she was shocked to learn during the comment process thatthe regulatory burden prevented some credit unions from attemptingloan workouts with members.

Written policy requirements, as well as new rules that definewhen a loan must be placed in nonaccrual status, go into effectOct. 1. Policies “should be commensurate with each credit union’ssize and complexity, and must be in line with the credit union’sbroader risk mitigation strategies,” which will avoid a one-sizefits all approach, Matz said. However, policies should defineeligibility requirements, including limits on the number of times aloan may be modified.

Written policies should also ensure workout decisions are basedon the borrower’s renewed willingness and ability to pay the loanand must establish controls to ensure appropriately structures.TDRs may not finance unpaid interest and fees, but third-partyfees, such as insurance or property taxes, may be included. If acredit union restructures a loan more often than once a year ortwice in five years, examiners will ask for proof of documentationof the borrower’s renewed willingness and ability to repay theloan.

The NCUA removed a proposed TDR provision that would haveimposed an aggregate limit for loan workouts based upon apercentage of net worth. Instead, the final rule includesadditional reporting requirements that will focus on the creditunion’s restructuring practices and how they increasecollectability.

The new rule also requires credit unions to increase TDRreporting to volunteers, and supporting documentation must be madeavailable to examiners.

Credit unions must place loans into nonaccrual status ifprincipal or interest has been in default for 90 days or more,unless the loan is well-secured or if the loan is maintained on acash basis and full payment is not expected. Loans may return toaccrual status if the past due status is less than 90 days, GAAPdoes not require it to be maintained on a cash or cost recoverybasis and repayment within a reasonable period is assured.

Member business loans, however, were given a different set ofaccrual status requirements. MBL nonaccrual status must bemaintained until the credit union can document the borrower’sfinancial condition and prospects for repayment, which wouldinclude a minimum of six consecutive timely payments.

Both CUNA and NAFCU expressed disappointment that MBL workoutswill be subjected to different standards. CUNA President/CEO BillCheney said he was pleased with the new rules, but he “had hopedmore could be done on member business loans.”

NAFCU General Counsel Carrie Hunt said she opposed the personalguarantee requirement for member business loans and said she hopedthe NCUA would reverse that requirement in the future. Hunt alsotook issue with the new written TDR policy requirements, saying itwould place a new regulatory burden on credit unions.

New rules extending regulatory flexibility standards to allcredit unions were also passed. Regulations governing charitabledonations were removed completely, although such donations muststill comply with the Federal Credit Union Act and credit unionbylaws.

Nonmember deposit flexibility, while extended to all creditunions, is now minus a standardized cap exemption. While creditunions can apply to their regional director for an exemption, therule sets a threshold that cannot exceed 20% of the credit union’stotal shares.

Other RegFlex provisions granted to all credit unions include asix-year time frame to partially occupy unimproved land for futureexpansion. Well-capitalized credit unions may also purchasezero-coupon investments with maturity dates up to 30 years, whilecredit unions with less than 7% net worth may purchase zero-couponinvestments with maturity dates up to 10 years.

Well-capitalized credit unions can engage in borrowingrepurchase transactions with mismatched maturities. However, thetotal value of such investments cannot exceed a credit union’s networth.

Private-label mortgage-backed securities are also now allowedfor all well-capitalized credit unions, with limits. Credit unionsthat do not meet well-capitalized standards can also purchaseprivate label MBS with stricter limits.

Matz said that she supported RegFlex rules when they wereapproved back in 1992, but the board at that time wasn’t sure ifthe relaxed rules went too far. In retrospect, Matz said RegFlexwas successful, and as a result, the NCUA is extending it to allwell-capitalized credit unions, and some provisions that pose nothreat to safety and soundness to credit unions that aren’twell-capitalized.

NCUA Examination and Insurance Director Larry Faziosaid he will issue supervisory guidelines on the new rules toexaminers and credit unions, as well as host webinars for both.

Chief Financial Officer Mary Ann Woodson presented quarterlyfinancial reports for the share insurance fund and corporate fund,which largely remained unchanged from December 2011 reporting.CAMEL ratings improved across the board during the first quarter.Woodson said she expects the share insurance fund’s equity ratio toend the year around 1.30%, slightly lower than the first quarter’s1.32% figure.