On April 2, the NCUA released Letter 13-3 “Supervisory Guidance on Troubled Debt Restructurings”. The letter discusses the May 2012 updated requirements of TDR reporting and internal controls, which the blog has covered previously.
Included in the 20+ page letter are examiner responsibilities as they relate to TDRs. Below are some excerpts you may be interested in when preparing for your exam.
According to the letter, …examiners will check to see if the credit union has outstanding workout loans or is planning to begin this activity. If not, a written loan workout policy is not required
As it relates to testing of individual transactions, the letter points to risk focused examination processes, and presents the examiner with several questions to ask themselves when determining the scope of the review, including:
- Is the level of earnings sufficient to withstand proportionate incremental differences in ALLL valuations without causing a reader of financial statements to reach incorrect conclusions about the health of the credit union
- How great would incorrect accounting/valuation need to be to result in a lower net worth category?
- How great would incorrect accounting/valuation need to be to cause positive earnings to become negative
There are a few other questions, but according to the letter if initial analytical testing reveals limited exposure, then examiners will limit the review to a high-level review of policy, controls and reporting.
At the very least if I could say “100% of all TDRs could charge off with no recoveries and none of the three conditions above would change”, I would argue that the limited review would be warranted. Most credit unions, in my opinion, fall into this category.
In addition to the questions outlined in Twenty Twenty Analytics’ published Sample TDR Policy The Supervisory Letter instructs examiners to consider the following questions when reviewing your loan workout policy’s addressing of borrower eligibility:
- Are there limits on collateral types or specific loan types?
- Will there be provisions for requesting additional collateral?
- How will the credit union handle balloon payments or principal amortization?
- Will the credit union set debt to income limits for workout loans?
- Does the policy address permanent reductions in income vs. temporary hardships? The workout terms should align with the circumstances?
- Does the credit union test for financial impact prior to the restructure, i.e., does the credit union compare the cost of concessions to the borrower with the estimated loss given foreclosure?
- Does the policy address reporting requirements?
I would make the case that if the answer to some of those questions were “no”, then they could be omitted from your policy. That’s probably not going to fly with your examiner. I would just go ahead and address them the first time around to avoid the exam comments altogether.
The Supervisory Letter serves as a tool to understand what examiners should be focusing on. It can save you a great deal of time to understand the information detailed in these letters. If presented with seemingly daunting exam requests or recommendations, you then have the knowledge to sit down with your examiner and discuss what portion(s) of the supervisory letter they are concerned with, the relevance of that focus to your credit union and the quickest route to addressing their concern.