TDR Rule Brightens CUs Financials
Credit unions that have restructured loans for struggling members no longer have to pay the price on their financial performance reports. That’s because a final rule released in May by the NCUA, which applied GAAP standards to the reporting of delinquent restructured residential mortgage loans, 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 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 now reported delinquent on Call Reports only after falling 60 days past due.
The result at some credit unions has been substantial, particularly in the hard-hit sands states. Aggregate delinquency figures for the second quarter are not yet available from the NCUA, but spot checks of individual credit unions with community fields of membership reveal big improvements as a result of the new rule.
One Nevada Credit Union President/CEO Brad Beal said the new rule has helped improve his delinquency numbers. The $693 million Las Vegas-based credit union saw its delinquency ratio fall 58 basis points from first quarter to second quarter thanks in part to a reduction in reportable modified real estate delinquencies from $1.34 million to just $123,000.
The $1.35 Arizona Federal Credit Union saw its delinquency ratio drop dramatically, from 2.45% in the first quarter to 1.39% in the second. According to AFCU’s Call Reports, reportable modified real estate delinquencies were cut in half, from nearly $4 million in March to nearly $2 million in June.
In southern California, the $1.7 billion California Coast Credit Union saw its reportable modified real estate delinquencies drop from nearly $7 million during the first quarter to $3 million. Cal Coast’s delinquency ratio fell from 1.55% in March to 0.81% in June. The $708 million Altura Credit Union, headquartered in the struggling Inland Empire region of Los Angeles, reduced its reportable modified real estate delinquencies from $3.3 million as of March 31 to just $133,000 as of June 30. Altura’s delinquency ratio was reduced from 2.04% to 1.19% during the same period.
In northern California, the $8 billion The Golden 1 Credit Union reduced its reportable modified real estate delinquencies from $20.3 million in the first quarter to just $7.6 million in the second.. The credit unions’s delinquency ratio fell 46 basis points during that period as a result.
At the $3.8 billion Patelco Credit Union, reportable delinquent modified real estate loans dropped from nearly $26 million in March to a little more than $6 million in June. The Pleasanton, Calif.-based credit union’s delinquency ratio dropped from 3.41% in March to 2.00% as of June 30.
Some of Patelco’s 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 showed $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 third-quarter 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 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 billionaires’ 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.
The NCUA’s aggregate second-quarter numbers should accurately reflect the impact of the new rule. Agency spokesman John Fairbanks confirmed that although the final TDR rule has a tiered phase-in, the delinquency reporting provision had a June 30 effective date.
When asked if NCUA examiners are struggling with an epidemic of credit unions making improper loan modifications, such as agreeing to monthly mortgage payments as low as $1 per month to avoid foreclosure, Fairbanks said the NCUA was unaware of widespread reckless modification programs. He added that such modifications would likely trigger TDR accounting that requires a credit union to perform a rigorous cost analysis to appropriately recognize losses.
When evaluating a credit union’s TDR policy and workouts, the NCUA first examines the policy’s soundness, completeness and controls, and evaluates the level of risk in relation to the credit union’s ability to absorb risk. If a credit union is accepting too much risk, the NCUA would deal with that risk on a case-by-case basis, he said.
If an examiner identifies material policy weaknesses or a lack of compliance with sound policies and procedures set by the credit union’s board, it would trigger an exception and necessary action, Fairbanks added.