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