TDR Burdens Eased, RegFlex Expanded by NCUA Board
Final rules passed at the NCUA board meeting May 24 include the extension of regulatory flexibility standards to all credit unions, and new rules for troubled debt restructuring that will require written loan workout and nonaccrual policies.
Despite the new written policy requirements, which were opposed by trade organizations, credit unions scored a win in that the past due status of TDRs will now be calculated consistently with loan contract terms, rather than requiring past due status to be reported until six consecutive on-time payments have been made. The new reporting requirements will go into effect June 30.
Credit unions will also be pleased to learn that the NCUA removed the requirement to manually track TDRs. Chairman Debbie Matz said she was shocked to learn during the comment process that the regulatory burden prevented some credit unions from attempting loan workouts with members.
Written policy requirements, as well as new rules that define when a loan must be placed in nonaccrual status, go into effect Oct. 1. Policies “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,” which will avoid a one-size fits all approach, Matz said. However, policies should define eligibility requirements, including limits on the number of times a loan may be modified.
Written policies should also ensure workout decisions are based on the borrower’s renewed willingness and ability to pay the loan and must establish controls to ensure appropriately structures. TDRs may not finance unpaid interest and fees, but third-party fees, such as insurance or property taxes, may be included. If a credit union restructures a loan more often than once a year or twice in five years, examiners will ask for proof of documentation of the borrower’s renewed willingness and ability to repay the loan.
The NCUA removed a proposed TDR provision that would have imposed an aggregate limit for loan workouts based upon a percentage of net worth. Instead, the final rule includes additional reporting requirements that will focus on the credit union’s restructuring practices and how they increase collectability.
The new rule also requires credit unions to increase TDR reporting to volunteers, and supporting documentation must be made available to examiners.
Credit unions must place loans into nonaccrual status if principal or interest has been in default for 90 days or more, unless the loan is well-secured or if the loan is maintained on a cash basis and full payment is not expected. Loans may return to accrual status if the past due status is less than 90 days, GAAP does not require it to be maintained on a cash or cost recovery basis and repayment within a reasonable period is assured.
Member business loans, however, were given a different set of accrual status requirements. MBL nonaccrual status must be maintained until the credit union can document the borrower’s financial condition and prospects for repayment, which would include a minimum of six consecutive timely payments.
Both CUNA and NAFCU expressed disappointment that MBL workouts will be subjected to different standards. CUNA President/CEO Bill Cheney said he was pleased with the new rules, but he “had hoped more could be done on member business loans.”
NAFCU General Counsel Carrie Hunt said she opposed the personal guarantee requirement for member business loans and said she hoped the NCUA would reverse that requirement in the future. Hunt also took issue with the new written TDR policy requirements, saying it would place a new regulatory burden on credit unions.
New rules extending regulatory flexibility standards to all credit unions were also passed. Regulations governing charitable donations were removed completely, although such donations must still comply with the Federal Credit Union Act and credit union bylaws.
Nonmember deposit flexibility, while extended to all credit unions, is now minus a standardized cap exemption. While credit unions can apply to their regional director for an exemption, the rule sets a threshold that cannot exceed 20% of the credit union’s total shares.
Other RegFlex provisions granted to all credit unions include a six-year time frame to partially occupy unimproved land for future expansion. Well-capitalized credit unions may also purchase zero-coupon investments with maturity dates up to 30 years, while credit unions with less than 7% net worth may purchase zero-coupon investments with maturity dates up to 10 years.
Well-capitalized credit unions can engage in borrowing repurchase transactions with mismatched maturities. However, the total value of such investments cannot exceed a credit union’s net worth.
Private-label mortgage-backed securities are also now allowed for all well-capitalized credit unions, with limits. Credit unions that do not meet well-capitalized standards can also purchase private label MBS with stricter limits.
Matz said that she supported RegFlex rules when they were approved back in 1992, but the board at that time wasn’t sure if the relaxed rules went too far. In retrospect, Matz said RegFlex was successful, and as a result, the NCUA is extending it to all well-capitalized credit unions, and some provisions that pose no threat to safety and soundness to credit unions that aren’t well-capitalized.
NCUA Examination and Insurance Director Larry Fazio said he will issue supervisory guidelines on the new rules to examiners and credit unions, as well as host webinars for both.
Chief Financial Officer Mary Ann Woodson presented quarterly financial 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 to end the year around 1.30%, slightly lower than the first quarter’s 1.32% figure.