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NCUA Board Approves TDR Final Rule

The National Credit Union Administration (NCUA) met on May 24 and took positive steps to improve the regulatory and reporting treatment for troubled debt restructurings (TDR). The NCUA Board also eliminated the RegFlex program, but folded authorities under the program into the various rules that have applied to RegFlex activities. The meeting summary provided by CUNA is listed below. 

Final Rule – Troubled Debt Restructurings

The Board approved a final rule to amend Part 741 of NCUA Regulations, along with an Interpretative Ruling and Policy Statement (IRPS) on “Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans” (TDRs) as Appendix C to Part 741.  The final rule is generally consistent with the proposal, and includes clarifications and improvements CUNA sought.

Importantly, the final rule excludes the proposed requirement that federally insured credit unions (FICUs) adopt aggregate limits in their loan workout and nonaccrual policies tied to net worth.

This is a rule that CUNA and leagues had actually urged the agency to adopt. We also urged NCUA to work closely with the association and leagues to determine what should be addressed in the final rule.

Again, CUNA commends leagues who partnered with CUNA on this issue as well as Northwest Credit Union Association President and CEO John Annaloro, along with credit union CFOs Scott Waite, Pam Finch and Keith Peterson, who served on the NCUA working group to develop the rule. 

During the meeting today, Chairman Matz stated her appreciation for the work of the trade associations and credit union leaders, who volunteered their time to provide the agency with expertise on accounting issues. 
The final rule amends NCUA’s regulations to require FICUs to maintain written policies that address the management of loan workout arrangements and nonaccrual policies for loans, consistent with industry practice or Federal Financial Institutions Examination Council (FFIEC) requirements.  The rulemaking includes the IRPS mentioned above that will assist FICUs in complying with the rule.  The IRPS addresses regulatory reporting of TDRs on FICU call reports.

As CUNA requested in our comment letter to the agency, once effective, the guidance will allow FICUs to modify loans without having to classify performing TDRs as delinquent or track each TDR’s performance manually for 6 months, as is currently required.  The changes allow delinquencies on TDRs to be calculated consistent with loan contract terms, including amendments made to loan terms by a formal restructure.

The final rule and guidance address the treatment of restructured member loans separately. The guidance spells out:

…A formally structured member business loan workout need not be maintained in nonaccrual status provided the restructuring and any charge-off taken on the loan are supported by a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment under the revised terms. Otherwise, the restructured loan must remain in nonaccrual status.

The guidance further clarifies that the “evaluation must include consideration of the borrower’s sustained historical repayment performance for a reasonable period prior to the date on which the loan is returned to accrual status.” It notes that a “sustained period of repayment performance would be a minimum of six consecutive payments and would involve timely payments under the structured loan’s terms of principal and interest in cash or cash equivalents.”

The final rule is generally effective 30 days after publication in the Federal Register.  The compliance date for the rule’s requirements to adopt written policies addressing loan workouts and nonaccrual practices is October 1, 2012.  The compliance date for the rule’s requirement regarding collection of nonaccrual status data is December 31, 2012.

In an effort to minimize any confusion regarding the rule’s changes, staff mentioned that NCUA will be: (1) issuing a supervisory letter, which will also be sent as a Letter to Credit Unions; (2) holding a webinar for NCUA examiners; and (3) holding a webinar for credit unions.

We will be reviewing the final rule in detail with CUNA’s Examination & Supervision Subcommittee and Accounting Subcommittee. Here is a chart below from NCUA on the effective and compliance dates associated with the rule.

Final Rule – Amendments to RegFlex Rule; Interim Final Rule on Fidelity Bond Coverage

The Board approved a final rule that removes Part 742 to eliminate the Regulatory Flexibility (RegFlex) program effective 30 days from publication in the Federal Register.  The final rule adopts the proposed changes almost exactly as proposed, and also make changes to related rules designed to ease some compliance burdens on federal credit unions (FCUs). 
In addition, the Board issued for a 60-day comment period an interim final rule to remove references to RegFlex in setting the permissible deductible for fidelity bond coverage, which was inadvertently omitted from the RegFlex rulemaking.  This interim final rule permits a maximum deductible for fidelity bond coverage of $1 million if the FCU has: (1) a CAMEL rating of “1” or “2” during its last two full examinations, and (2) maintained a “well capitalized” net worth classification for the immediately preceding six quarters, or for the immediately preceding six quarters after applying the applicable risk-based net worth (RBNW) requirement.  
The RegFlex final rule:

  • Places most of the six flexibilities of the current RegFlex rule into the subject-specific rules that apply to all FCUs.  These areas include 1) charitable contributions; 2) nonmember deposits; 3) fixed assets; 4) zero-coupon investments; 5) borrowing repurchase transactions; and 6) commercial mortgage related securities (CMRSs).
  • Makes changes with regard to fixed assets.  An FCU must partially occupy premises it acquires for future expansion within three years, unless the FCU obtains a waiver.  The final rule amends the fixed assets rule to extend the three-year time period to six years for any FCU that is acquiring unimproved land.
  • Eliminates the entire charitable contributions rule (§ 701.25), so that any FCU can make donations based on sound judgment and business practices without prior approval of its board of directors and without regulatory restrictions as to fund recipients.
  • Allows FCUs to accept more nonmember deposits, by raising the dollar limit in § 701.32(b) from $1.5 million to $3 million.  This allows FCUs with less than $7.5 million in total shares to accept up to $3 million in nonmember deposits.
  • Permits extended maturities for zero-coupon investments to a maximum of 30 years for any FCU that meets a "well capitalized standard," meaning one that has received a CAMEL rating of 1 or 2 during its last two examinations and (1) has maintained a "well capitalized" net worth classification for the immediately preceding six quarters or (2) has remained "well capitalized" for the immediately preceding six quarters after applying the applicable risk-based net worth (RBNW) requirement.
  • Adds a grandfather provision to § 703.18 for zero-coupon investments purchased under RegFlex authority before the effective date of the final rule.
  • Permits borrowing repurchase transactions for those FCUs meeting the "well capitalized" standards, and also extends relief from the maturity requirement to FCUs that do not meet the "well capitalized" standard. 
  • Allows FCUs to purchase private label CMRSs under similar conditions as provided in the current RegFlex rule.
  • Moves the provisions to buy nonmember and other obligations currently found in the RegFlex rule into the eligible obligations rule.

NCUA’s Office of General Counsel will be issuing a legal opinion letter within the next few weeks to clarify certain issues related to the fixed assets rule, including its provision on unimproved land.

Final IRPS – Supervisory Review Committee

The Board approved a final IRPS that amends IRPS 11-1 on NCUA’s Supervisory Review Committee (SRC) to remove the RegFlex designation determinations from the list of material supervisory determinations credit unions may appeal to the SRC. Even though this is a final rule, NCUA will accept comments for 30 days after it is published in the Federal Register. Unless NCUA withdraws the rule after comments are received, it will be effective 60 days from publication in the Register.

Quarterly Report on National Credit Union Share Insurance Fund (NCUSIF)

The latest NCUSIF report reflects the positive trends the credit union system is experiencing. NCUA staff reported that the NCUSIF’s equity ratio was at 1.32% as of March 31, 2012.  If the NCUSIF’s equity ratio is above its normal operating level of 1.30% at year-end the excess must be transferred to the Temporary Corporate Credit Union Stabilization Fund to repay its borrowings.  However, in response to a question from Board Member Hyland regarding such a scenario, NCUA CFO Mary Ann Woodson stated that the agency anticipates the equity ratio will be 1.30% at the end of 2012.

NCUA also reported that as of March 31, there are 396 CAMEL 4 and 5 credit unions, which represent 2.98% of insured shares, or approximately $23.7 billion. The number of troubled credit unions is down from 409 as of December 31, 2011, as are the insured shares in such credit unions from $26.3 billion, or 3.31% of insured shares, as of December 31, 2011. NCUA staff also noted that there are 1,662 CAMEL 3 credit unions, which represent 15.13% of insured shares, or $120.3 billion. Combined, insured shares in CAMEL 3, 4, and 5 credit unions represent approximately 18.1% of total insured shares, down from 19.2% at the end of 2011. There have been 7 total credit union failures thus far in 2012, as compared to a total of 16 during 2011.