A final rule released in May by the NCUA, which applied GAAP standards to the reporting of delinquent restructured residential mortgage loans, has had a dramatic effect on the financial peformance reports of some credit unions.
That rule included a provision that released credit unions from reporting troubled debt restructured loans as delinquent until the borrower had made six months’ worth of consecutive, on-time payments.
The rule brought the NCUA up to speed with other financial regulators like the FDIC and Federal Reserve, which had been following GAAP standards that only required TDRs be reported as delinquent consistent with other loans.
For credit unions, that means TDRs are reported delinquent on Call Reports after falling 60 days past due.
The result at some credit unions has been substantial. At the $3.8 billion Patelco Credit Union in Pleasanton, Calif., reportable delinquent modified first mortgage and “other” real estate loans and lines on the Pleasanton, Calif.-based credit union’s Call Reports dropped from nearly $26 million in March to a little more than $6 million in June. Patelco’s delinquency ratio dropped from 3.41% in March to 2.00% as of June 30.
Some of that ratio improvement was the result of an improving loan portfolio, said Chief Financial Officer Scott Waite, but most came from the new rule.
Waite provided his May 31 numbers to Credit Union Times, which show $40 million of true delinquencies, which meant a delinquency ratio of 1.97%. However, when adding another $22.5 million in TDR delinquencies that wouldn’t otherwise have been reported, Patelco’s May 31 delinquency ratio jumped to 3.07%.
“The effect – 111 basis points – was substantial,” Waite said. “Because a lot of external parties weren’t as familiar with the NCUA’s rule, they thought we had a truly disastrous credit issue.”
After the NCUA enacted the six-month consecutive payment requirements for TDRs back in the third quarter of 2009, Waite said he received a call from the Federal Reserve, questioning Patelco’s creditworthiness in regard to its line of credit with the Fed.
The $25 billion State Employees’ Credit Union in North Carolina received a similar call from the Fed, said President/CEO Jim Blaine.
State Employees’ reported delinquent modified first mortgages and “other” real estate loans and lines dropped from $387 million in March to $138 million in June. SECU’s delinquency ratio dropped as a result from 3.62% to 1.68% of total loans.
Blaine was critical of the NCUA’s lack of responsiveness to an issue that had plagued credit unions for nearly three years.
“These days we all have to adapt to the volatility in the economy, but the regulator has to play that game, too,” he said. “TDR is most evident sign they’re not keeping up. They knew they were out of sync for a long time.”
Waite said the rule will have the greatest effect on credit unions with more than $1 billion assets; of the $9 billion in reportable TDR balances in the industry, $6 billion were from the billionaire’s club.
Total credit union delinquency during first quarter 2012 was 1.40%, and Waite said he’s looking forward to comparing that figure against aggregate second quarter numbers, which have not yet been released.
“Everybody in California is jumping up and down about this,” Waite said of the new rule.