Congressional Action on Overdraft Changes

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Congressional Action on Overdraft Changes Heats Up

A second bill to regulate financial institutions overdraft practiced is scheduled to be introduced to the Senate the week of July 22nd by Senator Brown (D–Ohio)Action on overdraft practices has increased since the CFPB released its study of overdraft programs which found that “overdraft programs can be costly for the consumers who use them, and that both consumer outcomes and policies related to overdraft programs can vary considerably.”

The first bill, H.R. 1261, was introduced by U.S. Representative Maloney (D-NY). H.R. 1261 would:

  • Require overdraft fees to be reasonable and proportional;
  • Limit overdraft to one per month and six per year;
  • Codify the opt-in provisions that the Fed promulgated requiring that consumers opt-in to overdraft coverage;
  • Prohibit institutions from manipulating the order of transactions to maximize overdraft fees; and
  • Add additional disclosures to consumers about overdraft coverage programs

Senator Brown’s bill, which is still being finalized, would:

  • Empower the Consumer Financial Protection Bureau to monitor financial institutions overdraft practices;
  • Require the CFPB establish fair guidelines to protect consumers; and
  • Require financial institutions post transactions and communicate process in an easy to understand format.
  • Provide safe harbor for financial institutions that follow CFPB overdraft guidelines.

This congressional activity could seriously impact overdraft programs offered by credit unions throughout the country

The Credit Union National Association and state leagues and associations across the country are urging credit unions to engage their members in preserving the tax status of credit unions. Credit unions, in turn, are doing their part, including asking for “love letters.”

Source: CUNA

Troubled Debt Restructure (TDR)

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Troubled Debt Restructuring Final Rule

The NCUA board recently adopted a final TDR rule (Part 741) and loan workout guidance (Part 741, Appendix C). The final rule sets no limit on the amount of troubled loans that credit unions can work out with members. The rule also removes unnecessary manual tracking procedures and allows credit unions to modify loans without having to immediately classify TDRs as delinquent. Specific changes include:

  • October 2012-Requiring federally-insured credit unions to adopt and adhere to written policies that govern loan workout arrangements that assist borrowers.
  • June 2012-Allowing credit unions to calculate the past due status of all loans consistent with loan contract terms, including amendments made to loan terms through a formal TDR.
  • June 2012-Eliminating the dual and often manual delinquency tracking burden on credit unions for managing and reporting TDR loans.
  • October 2012-Reaffirming current industry practices by requiring credit unions to discontinue interest accrual on loans past due by 90 days or more and to establish requirements for returning such loans to accrual status.

Key TDR Accounting Guidance

• Codification Topic 310-40 (Receivables/Troubled Debt Restructurings by Creditors)

• Formerly: • FAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring

      • FAS 114, Accounting by Creditors for Impairment of a Loan

      • FAS 118, Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosures

Loans that fit the troubled debt restructuring definitions share the traits of modified loans yet have two additional characteristics:

  1. The modification is due to economic or legal reasons related to the debtor’s financial difficulties; and
  2. The modification provides for a reduction in interest and principal.
All TDRs are modified loans; however, not all modified loans are considered TDRs.
In a trouble debt restructuring, the credit union, the creditor, grants a concession to the member, the debtor, that the creditor would otherwise not consider if it were not for the financial difficulties being experienced by the debtor.  These difficulties could be either legal or economic.  Trouble debt restructures are always evidence by an agreement between the parties or based on terms imposed by a court of law.
The benefits of a TDR for the member are as follows:
  1. Assist the debtor through a period of financial difficulty; and
  2. Assist the debtor avoid a repossession or foreclosure.
The benefits of a TDR for the credit union are as follows:
  1. Increases the likelihood of repayment on loans by members having financial difficulty;
  2. Lessens the likelihood of repossession or foreclosure; and
  3. Increases member retention.

Loans that are refinanced or modified just to keep members whose loans are current from refinancing elsewhere for a better rate are not modified loans.

How do I calculate a loss on a TDR? More

An Understanding of a Credit Union Net Worth Restoration Plan

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Due to recent declines in the equity markets, some credit unions may experience an increased flow of funds coming into their organization at a time of weak loan demand and low investment returns. This “flight-to-safety” for some credit unions could result in the need to submit a “Net Worth Restoration Plan”.

The Net Worth Restoration Plan commonly referred to as NWRP serves as a blueprint for the board and management to restore and maintain for four consecutive quarters the credit union’s net worth ratio to 6% or greater and to establish a financial framework for the 1/10th percent (0.1%) quarterly earnings waivers transfers.

Understanding the implications of the credit union having an inadequate level of net worth is important.  Your primary goal should be safeguarding the member’s deposits through sound policies and practices, and by creating and sustaining a sufficient amount of net worth and reserves to absorb possible losses without endangering the stability of the credit union.

Your plan needs to meet the criteria set forth in NCUA Rules and Regulations 702.206-NWRP including: More

Allowance for Loan Loss

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The ALL estimate is guided by NCUA Rules and Regulations and Generally Accepted Accounting Principles (GAAP). The following resources were considered in the creation of this article:

  1. FASB ASC Topic 450: Accounting for Contingencies [formerly FAS 5];
  2. FASB ASC Topic 310: Accounting for Receivables [formerly FAS 114];
  3. NCUA Interpretive Ruling and Policy Statement 02-3: ALLL Methodologies and Documentation for Federally Insured Credit Unions;
  4. NCUA Letter to Credit Unions 03-CU-01: Loan Charge-off Guidance; and
  5. NCUA Accounting Bulletin No. 06-01

Because of the newly implemented ASC, it maybe difficult, especially for those, like myself, who are familiar with the original FASB standards, to identify the most current accounting reference materials.

There are two primary topics under the ASC that address the ALL. Key concepts extracted from Topics 450 and 310 of the ASC are summarized below.

  1. Topic 450, Subtopic 20, “Loss Contingencies,” addresses accounting for loss contingencies. Much of this topic is derived from Statement of Financial Accounting Standards (SFAS) Statement 5, “Accounting for Contingencies.  Topic 450 specifically references Topic 310, noting that the ALL is a subset of loss contingencies.
  2. Topic 310, “Receivables,” addresses various issues related to accounting issues subsequent to the origination or acquisition of receivables, such as impairment. Former accounting standards SFAS 5, SFAS 15, and SFAS 114 provide much of the content for this section.

Subjective and Imprecise

The appropriate degree of allowance involves a high degree of “management judgment” within a “range of estimated losses.”  Moreover, determining the allowance for loan and lease loss, hereafter referred to ALL is “subjective and imprecise.”  ALL estimates are based on a comprehensive, well documented and consistently applied analysis of the credit union’s loan portfolio.

ALL takes into consideration available information as of the financial statement date including environmental factors. The ALL provides an estimate of probable but unconfirmed losses in the loan portfolio as of the financial statement date; it is not a reserve for future anticipated losses.    The use of environmental factors may likely cause estimated credit losses associated with the credit union’s existing loan portfolio to differ from the historical loss experience.  Your analysis should consider significant factors affecting the collectibility of the portfolio and attempts to support the credit losses estimated by the ALL process. A credit union should adopt methodologies and documentation practices that are appropriate for their size and complexity.  Credit unions with fewer and less complex loan products, the amount of supporting documentation for the ALL may be less exhaustive than for credit unions with more complex loan products or portfolios. Your methodology and documentation needed to support the ALL estimates should be prepared in accordance with generally accepted accounting principles (GAAP).  The Statement of Financial Accounting Standard (FAS) 5 will be most relevant to the majority of credit unions. Finally, understanding the theory, building strong policies and analytics, and increasing director governance are key to a successful ALL outcomes. More

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