troubled debt restructuring a regulator’s perspective
TRANSCRIPT
Troubled Debt RestructuringA Regulator’s Perspective
Presenters
Jane Johnson, Financial Examiner Supervisor, Division of Credit Unions, Department of Financial Institutions
Elizabeth Habring, Supervisory Examiner, Region V, National Credit Union Administration
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
‘What is a TDR?’ Troubled Debt Restructuring results when
the lender grants concessions, that would not ordinarily be granted, to the member in light of the members' financial difficulties.
Concessions often involve a reduced interest rate, payment or principal amount.
Routine changes in debt terms and loan deferrals are not considered troubled debt restructurings unless they are granted due to the adverse financial condition of the member.
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
Concessions Include Reduction of the contractual
(stated) interest rate Extension of the maturity date Suspension of contractual
payments Reduction of the face amount of
debt, i.e., forgiveness of a portion of principal
Reduction (forgiveness) of accrued interest
Reduction (forgiveness) of fees
‘Are TDRs a “bad” thing?’
Not trying to discourage
TDR is an expected part of a credit union’s management of assets
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
GAAP is set forth in the FASB
CPA firms consider materiality.
From a regulatory perspective, materiality is not the only issue. SFAS 15
SFAS 114
SFAS No. 5
EITF 02-4
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
‘What about refinances?’
When a borrower refinances or restructures a loan, and the terms are at least as favorable to the lender as the terms for comparable loans to other members with similar collection risks who are not refinancing or restructuring, the refinanced loan should be accounted for as a new loan.Washington State Department of Financial Institutions
”Regulating financial services to protect and educate the public and promote economic vitality.”
Example of TDR & Refinance Current used auto loan rate is 5%.
TDR: Joe has a 7% used auto loan (pymt $346, 12 month term). Credit Union agrees to accept 3% interest, (pymt $172, 24 month term).
Refinance: Sue has a 7% used auto loan (pymt $346, 12 month term). Credit union agrees to accept 5% interest (pymt $342, 12 month term).
‘How is a TDR reported?’
Vast majority of TDR are immaterial for balance sheet purposes
BUT: TDRs must be reported on 5300 Call Report
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
5300
Page 9 “Delinquent Loans” by Collateral Type, lines 1 thru 15
Report TDRs as delinquent with original loan contract terms until the borrower is current with the new terms for 6 months
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
Original loan requires monthly payments of $400 at an interest rate of 6% with 9 months left in term of an unsecured loan. The credit union agreed to accept monthly payments of $275 at 10% for 12 months.
Example: Report of Consumer Loan TDR
Month Payment Status
Feb $300 Delinquent (60 days)
Mar $275 Delinquent (90 days)
Apr $275 Rewrote to new terms (TDR)
May $275
June $275 Report loan as delinquent on 5300 Delinquent (180 days)
July $275
August $275
September
$275 Report loan as current on 5300.
5300 (continued)
Page 15 “Specialized Lending” Section 2 RE Loans, Line 14
RE loans whose terms have been modified due to the inability of the borrower to meet the original terms of the note
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
Accrual
For regulatory reporting purposes TDR loans may not be returned to full accrual status until the six-month consecutive payment requirement is met.
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
‘Won’t that increase my delinquency ratio?’
Yes Increases are expected especially
in this market
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
‘But what if I’m not losing any money?’
A loan is “impaired” when, based on current information and events, it is probable that an institution will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Therefore, impairment is measured using an estimate of the expected future cash flows (NPV).
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
NPV
For the majority of TDR loans we see in Credit Unions, there is a loss but it is immaterial for balance sheet purposes.
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
Why do we need to report this?
Regulators (and credit union management) look to the delinquent loan reporting to provide insight into the quality of the loan portfolio.
Your internal management assessment
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
Internal Management Assessment
Top management and the Board should be aware of the level of restructuring
TDR is a useful and effective way to manage troubled assets and should be considered in any workout / foreclosure / repo decision
By keeping track of the TDRs being done, management can ensure that TDRs are being used as planned
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
Example of Analysis Loan: car loan of $30,000, 6%, 36 months, Pymt =
$913 After the Member makes the 12th monthly payment
they tell you their spouse lost their job and they can’t afford the car anymore – they are thinking of turning in the car to you
Blue Book says that in today’s market the Credit Union would sustain at least an $8,000 loss if you repo’d it
The Member says he could afford a monthly pymt of $750 but only for 2 years
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
What do you do?
Repo the car and take the $8K loss?
TDR and lower the payment to $750 for next 24 months?
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
TDR is More Beneficial to CU
The amount of impairment on the restructured loan (i.e., the FAS 114 allowance) is the excess of the recorded investment in loan over the present value of expected future cash flows
=PV(rate,months,pymt) =PV((6%/12),24,750)=$16,922 Loan balance at time of
modification = $20,592 Difference (Loss) = $3,370
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
What’s the bottom line?
If a new member walks in your door today, would you make a new loan at the workout rate and terms? If not, it’s a TDR.
To leave delinquent loan status, the TDR must perform for 6 months under the new (re-written) contract terms.
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
References
NCUA Accounting Bulletin 06-01
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”
How to Contact Us
Contact Us: Jane Johnson
Financial Examiner Supervisor of DCU [email protected]
Elizabeth A. HabringSupervisory Examiner – Region V
National Credit Union [email protected] ext 3548
Washington State Department of Financial Institutions”Regulating financial services to protect and educate the public and promote economic vitality.”