Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans, 31993-32004 [2012-13214]

Agencies

• National Credit Union Administration

[Federal Register Volume 77, Number 105 (Thursday, May 31, 2012)]
[Rules and Regulations]
[Pages 31993-32004]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13214]


-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741

RIN 3133-AE01


Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of 
Troubled Debt Restructured Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule; limited extension of compliance date for certain 
requirements.

-----------------------------------------------------------------------

SUMMARY: NCUA is amending its regulations to require federally insured 
credit unions (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 final rule 
includes guidelines, set forth as an interpretive ruling and policy 
statement (IRPS) and incorporated as an appendix to the rule, that will 
assist FICUs in complying with the rule, including the regulatory 
reporting of troubled debt restructured loans (TDR loans or TDRs) in 
FICU Call Reports.

DATES: The effective date for this rule is July 2, 2012. The compliance 
date is extended to October 1, 2012 for the rule's requirements to 
adopt written policies addressing loan workouts and nonaccrual 
practices and to December 31, 2012 to collect nonaccrual status data.

FOR FURTHER INFORMATION CONTACT: Director of Supervision Matthew J. 
Biliouris and Chief Accountant Karen Kelbly, Office of Examination and 
Insurance at the above address or telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION:

I. Background
II. Summary of Comments on the Proposed Rulemaking
III. Final Rule and IRPS
IV. Regulatory Procedures

I. Background

a. Why is NCUA issuing this rule?

    In order to better serve members experiencing financial 
difficulties over the last several years and improve collectability, 
FICUs worked with members and offered sensible workout loans, including 
programs offered through the Obama Administration's ``Making Home 
Affordable Program''.\1\ NCUA's existing reporting requirements creates 
practical challenges for the industry as the volume of workouts 
increased. To follow the NCUA 5300 Call Report (Call Report) 
instructions for reporting past due status on TDRs, many FICUs maintain 
separate, manual delinquency computations. To respond to feedback from 
the industry and in the spirit of reduced regulatory burden, the NCUA 
Board (Board) issued a Notice of Proposed Rulemaking (NPRM) in 
February. 77 FR 4927 (Feb. 1, 2012).
---------------------------------------------------------------------------

    \1\ The Making Home Affordable Program (MHA) was developed to 
help homeowners avoid foreclosure, stabilize the country's housing 
market, and improve the nation's economy. MHA includes such programs 
as the ``Home Affordable Refinance Program'' (HARP) and ``Home 
Affordable Modification Program'' (HAMP). Programs such as these 
further enable FICUs to provide workout loans to their members. For 
additional information regarding programs available through MHA see 
https://www.makinghomeaffordable.gov/pages/default.aspx.
---------------------------------------------------------------------------

    In the NPRM, the Board acknowledged the need to effectively balance 
appropriate loan workout programs with safety and soundness 
considerations. Such considerations can include the inability to 
identify deterioration in the quality of the loan portfolio and delayed 
loss recognition, in light of the high degree of relapse into past due 
status. The Board issued the NPRM with the goal of granting certain 
regulatory relief, instituting some countervailing controls, and 
clarifying regulatory expectations.
    In the NPRM, the Board proposed four regulatory changes through an 
amendment to Sec.  741.3 and the addition of proposed Appendix C to 
part 741. First, the NPRM proposed a requirement that FICUs have 
written policies addressing loan workouts and nonaccrual practices 
under Sec.  741.3. Second, the NPRM proposed to standardize an 
industry-wide practice by requiring that FICUs cease to accrue interest 
on all loans at 90 days or more past due, subject to a few exceptions. 
Third, the NPRM proposed that FICUs maintain member business workout 
loans in a nonaccrual status until the FICU receives 6 consecutive 
payments under the modified terms. Finally, the NPRM proposed that 
FICUs calculate and report TDR loan delinquency based on restructured 
contract terms rather than the original loan terms. To that end, the 
Board noted that NCUA would modify the Call Report to reduce data 
collection to TDRs as defined by GAAP.

b. When will FICUs have to comply with the final rule?

    The Board proposed that the final rule would go into effect 120 
days after it was published in the Federal Register and require that 
FICUs adopt the required written lending policies by such date. The 
NPRM also stated that NCUA would closely time its adjustments to the 
Call Report requirements for reporting TDRs with the rule and stated a 
goal for the Call Report requirements to go into effect no later than 
the quarter ending December 31, 2012. The NPRM specifically sought 
comments on the proposed implementation dates.
    In response to the NPRM, the Board received many varied comments on 
how it should approach implementation of the rule, appendix and NCUA's 
modification of the Call Report. One trade group urged NCUA to move 
forward with Call Report changes as soon as it adopted the rule, while 
a FICU supported the Call Report reporting requirements to become 
effective no later than December 31, 2012. One FICU commenter stated 
that the quick adoption of the proposed changes would have a profound 
effect on FICU personnel hours needed to perform the TDR reporting 
requirement and, therefore, requested implementation of the final rule 
by the end of the 2nd quarter of 2012. Likewise, another FICU stated 
that the December 31, 2012 report date would not give FICUs enough time 
to purchase software and perform a six-month due diligence review. The 
FICU noted that, while a new system can effectively capture new loan 
history, it will have serious challenges with systematically capturing 
existing loan history retrospectively for data previously tracked 
manually. The commenter

[[Page 31994]]

requested a two-year timeframe to allow appropriate time for due 
diligence and full compliance.
    One FICU and one league expressed concern that the proposed 120 
days compliance timeframe would not be enough time if a FICU has to 
modify systems. The FICU stated there may be disparities in how various 
computer systems handle the 90-day nonaccrual policy, as well as the 
handling of accrued interest, reprogramming, and testing. The commenter 
suggested that NCUA set a firm, but reasonable, date for compliance. 
Several commenters raised concerns about the ability of small credit 
unions to revise or implement changes to their lending policies and 
systems. Four leagues requested that small credit unions be given extra 
time or transition period beyond the proposed 120 days. One league 
suggested that NCUA permit compliance within 120 days, but not require 
compliance for at least 180 days to accommodate small credit unions. 
Similarly, one trade group, on behalf of FICUs that are able to comply 
with the changes, urged NCUA to adopt the rule and make it effective as 
soon as possible. Yet the trade group also asked for additional time 
for smaller institutions to comply with the final rule. One FICU asked 
NCUA to adopt the rule as soon as possible with a 180-day transition 
period for implementation. One league requested a twelve-month 
implementation period.
    After reviewing the various approaches suggested by the commenters, 
the Board has decided to make one provision of the final rule effective 
within 30 days of publication in the Federal Register, while delaying 
the compliance date of the other provisions. Under the final rule, 
FICUs will be required to calculate the past due status of workout 
loans consistent with loan contract terms, including amendments made 
through formal restructures as soon as the rule goes into effect on 
July 2, 2012. Data collections on the Call Report for the quarter 
ending June 30, 2012 will reflect revised TDR past due reporting. NCUA 
will begin collecting IRPS compliant data in the Call Report filing for 
quarter ending December 31, 2012. In order for FICUs to file the data 
related to loans placed in nonaccrual status in accordance with the 
final rule and IRPS for quarter ending December 31, 2012, FICUs must 
have their written nonaccrual and loan workout policies in place at the 
beginning of the quarter. The compliance date for adopting written loan 
policies and collecting nonaccrual information as discussed in Section 
III is October 1, 2012. FICUs, however, may adopt their policies and 
adjust their financial reporting systems as soon as is practicable 
after the rule's effective date, rather than waiting for the mandatory 
compliance date if they so choose.

II. Summary of Comments on the Proposed Rulemaking

    The NPRM's comment period ended on March 2, 2012. NCUA received 
forty-five comment letters on the NPRM: thirty from FICUs, two from 
trade associations representing credit unions, ten from state credit 
union leagues, one from an accounting firm, one from an organization 
representing state credit union regulators, and one from a non-profit 
policy organization. Of the forty-five comments received, thirteen 
commenters supported the rulemaking generally, while thirty-one 
commenters offered some support for the rulemaking but objected to 
certain provisions or requested substantive revisions. One commenter 
questioned the purpose of the proposed rule. For the reasons discussed 
below, the Board adopts the amendments almost exactly as it proposed 
but, as requested by many commenters, provides some clarifications and 
excludes the proposed requirement that FICUs adopt aggregate limits in 
their loan workout and nonaccrual policies tied to net worth.

a. Written Loan Workout Policy and Monitoring Requirements

    Thirteen FICUs, three leagues and the accounting firm supported the 
proposed rule's requirement that FICUs have a written loan workout 
policy combined with associated monitoring and controls. Most of these 
commenters stressed, however, that regulators must not review these 
policies from a standardized approach under the supervisory process. 
They urged regulators to afford a FICU an appropriate degree of 
flexibility based on the individuality of that FICU and the composition 
of its field of membership.
    They argued that each loan modification should stand on its own 
merits, and that a FICU should be able to modify a loan if it is in the 
long term best interests of the member and the FICU without a ``one 
size fits all'' approach in the guidelines. One trade group and one 
league stated that, while FICUs should maintain loan workout policies, 
examiners should not expect a separate policy on TDRs. These commenters 
also stated that examiners should recognize that loan workout policies 
and practices must be commensurate with a FICU's size and complexity. 
One league requested that NCUA provide, at a minimum, an outline with 
suggestions of specific areas that examiners will expect to see 
addressed in policies. It also suggested that any requirements for a 
policy allow room for an individual's particular circumstance. In 
contrast, one industry trade group opposed a requirement that FICUs 
adopt loan workout or nonaccrual policies and advocated that NCUA issue 
guidance rather than a rule. It noted that many FICUs already engage in 
such a practice and already have invested in implementing software.
    The Board continues to believe it is necessary to require a written 
loan workout policy. Because NCUA is relaxing its previous directives 
on past due calculations for TDRs and modifying the related Call Report 
data collections to reduce regulatory burden, the Board believes 
countervailing controls are necessary. It finds the final rule's 
requirement that FICUs adopt written loan workout and nonaccrual 
policies adequately addresses NCUA's supervisory interests. 
Furthermore, the Board notes the proposed IRPS clearly stated that a 
FICU's loan workout policy and practices should be ``commensurate with 
each credit union's size and complexity,'' in line with its broader 
risk mitigation strategies. 77 FR at 4934. By taking the approach in 
the NPRM that FICU management must design policies appropriate for 
their institutions, rather than setting forth ``bright line'' 
regulatory requirements or otherwise placing defined parameters on FICU 
policies, the Board acknowledges it is not appropriate to take a one-
size fits all approach. As such, the final rule and IRPS continue to 
give a FICU's management the ability to establish institution-
appropriate policies. In addition, the Board commits to providing 
NCUA's examiners with appropriate guidance for evaluating whether loan 
modifications made under a FICU's policy improves collectability.
    Most commenters objected to the requirement that loan workout 
policies establish particular limits or benchmarks. Four commenters 
stated that the imposition of aggregate limits is unnecessary and could 
result in greater risk to FICUs by preventing them from making sound 
decisions that could result in future collectability. One commenter 
stated that setting aggregate limits could create the unintended 
consequence of a FICU treating members differently if the FICU 
approaches any such regulatory limit. Other commenters echoed similar 
concerns, stating that loan modifications should always be considered 
when they are in the best interests of the lender and the borrower, but 
that FICUs need flexibility in the current economic

[[Page 31995]]

cycle. Failure to approve sound modifications simply because of a 
policy limit could increase risk of default and expose a FICU to 
reputation risk. Fourteen FICU commenters and three leagues 
specifically objected to tying loan modification program limits to a 
percentage of a FICU's net worth. One commenter stated that, while a 
limit might be appropriate for some FICUs, that same limit might not be 
the appropriate measure for others. Another FICU noted that its net 
worth declined during the recent severe economic conditions in its 
state. The FICU argued that, had the proposed limitation been in place, 
it would have reduced the FICU's ability to help members at a time when 
assistance was most needed. Another FICU noted that modifications are a 
risk mitigation strategy for loans already on a FICU's balance sheet, 
not a business strategy to incur additional risk.
    The Board carefully considered the substantial comments on the 
NPRM's requirement that a FICU's loan workout policy include aggregate 
program limits set to a percentage of its net worth and agrees with the 
commenters that the proposed requirement could prevent a FICU from 
appropriately mitigating risk and assisting its members. 77 FR at 4930, 
4934. The final IRPS does not include a requirement to place aggregate 
limits on a loan workout program as the Board proposed in the NPRM. As 
discussed in greater detail in Section III, NCUA will focus on a FICU's 
restructuring practices and whether its efforts have demonstrated an 
improvement in collectability of TDRs.
    Two commenters suggested that, instead of a specified aggregate 
limit, the rule require FICU management to provide enhanced reporting 
on TDR activity to the FICU's board of directors. Another commenter 
suggested mandatory reporting to the FICU board on a regular basis. The 
Board agrees with these suggestions and has incorporated enhanced 
reporting requirements in the final rule. One commenter suggested 
continued reporting in Call Reports, including the number of times a 
loan has been modified in a 12-month period. The Board will consider 
this suggestion as it moves forward with its modifications to the Call 
Report. One commenter stated that ensuring proper documentation 
supporting a TDR and the borrower's ability to comply with the new 
terms best addresses concerns that a FICU is masking true performance 
and the past due status of its portfolio. The Board agrees with the 
commenter. As discussed in Section III, the final IRPS addresses the 
need for proper documentation and effective restructuring practices, 
preventing delayed loss recognition.
    One FICU specifically commented on the proposal's requirement to 
limit the number of times a loan workout may be provided to a member 
over a period of time. The FICU stated that, while such a limit may 
eliminate the issue of masking problem loans, it also creates obstacles 
when there are legitimate reasons for multiple workouts. For example, 
as state and local governments and school districts have restricted 
spending, members endured layoffs and rounds of wage and hours cuts. As 
they have had to adjust their own budgets, many have asked their lender 
FICUs to revise terms of their workout loans. If a FICU's policy limits 
the number of times a workout loan can be modified or changed, these 
members will be adversely affected for no reason other than policy. 
Therefore, the commenter recommended that the rule be changed to allow 
workout loans to be modified any time a FICU can legitimately identify 
a reasonable change in the member's economic circumstances (i.e., 
income and other documentation should be required prior to making a 
change to a workout loan). The proposed IRPS in the NPRM includes a 
requirement that FICUs define eligibility requirements, including 
limits on the number of times an individual loan may be restructured, 
but these decisions as to limits are left to the discretion of the FICU 
when establishing its written policy. ``Loan workout arrangements 
should consider and balance the best interests of both the borrower and 
the credit union.'' 77 FR at 4934. The Board expects a FICU to evaluate 
the changed circumstances of an individual borrower with the need to 
improve collectability for the profitable operation of the institution. 
It is the FICU's responsibility to craft loan workout policies that 
strike that balance. NCUA will then measure the success of the policy 
based on the FICU's ability to collect TDRs. The final IRPS, therefore, 
retains the requirement to establish eligibility requirements as 
proposed in the NPRM.

b. Loan Nonaccrual Policy for All Loans and Restoration to Accrual for 
Loans Other Than Member Business Loan (MBL) Workout Loans

    Four FICUs and two leagues supported the proposed requirement that 
FICUs maintain nonaccrual policies that address the discontinuance of 
interest accrual for loans past due by 90 days or more and the 
requirements for returning such loans, including MBLs, to accrual 
status. The commenters noted that the proposed nonaccrual policy has 
long been the practice of FICUs and is supported by current institution 
interest management systems, so it would not present additional 
unwarranted work for FICUs. In addition, an accounting firm and two 
FICUs found the proposal consistent with industry practice and FFIEC 
requirements. They supported the proposed rule's effort to formalize 
the practice of placing loans on nonaccrual status when they are 90 
days past due. One league argued that compliance with the proposal 
would require FICUs to change loan tracking systems, thereby incurring 
significant programming costs. The final rule and IRPS retain the 
requirement for a written policy addressing nonaccrual practices as 
proposed in the NPRM, with a few clarifications as discussed below.
    One FICU objected to a blanket requirement that interest may not 
accrue on loans that are 90 days or more past due. The commenter stated 
that if a loan is performing at a level agreed to by the FICU and 
debtor, and it can be reasonably demonstrated that full recovery of the 
balance owed is likely, continuing to accrue interest due is 
appropriate and should be allowed. The commenter incorrectly 
characterized the requirement as a blanket prohibition. The proposed 
IRPS states that a FICU may not accrue interest on a loan in default 
for a period of 90 days or more ``unless the loan is both well secured 
and in the process of collection.'' Id. The final IRPS retains this 
provision.
    One FICU expressed concern that the proposal places an undue burden 
on individual small accounts and requested that the final rule exclude 
accounts under $25,000 from the nonaccrual policy. The commenter also 
suggested that NCUA consider using a more individualized index to 
determine a nonaccrual amount based on the total TDR classified loan 
balance. The commenter contended this approach would take far less time 
to calculate, and be more accurate, than under the current process. The 
Board does not agree with the commenter's rationale. The Board believes 
that a standard policy applicable to all loans in nonaccrual status, 
other than typically riskier and higher-dollar business loans, ensures 
consistency as the policy is employed by FICUs and reviewed by 
examiners.
    One industry trade group did not support a requirement that FICUs 
must adopt nonaccrual procedures because they are not required by GAAP 
or the Federal Credit Union Act. This commenter agreed, however, that 
the proposed IRPS' restoration to accrual

[[Page 31996]]

status for loans, excluding MBL workouts, is consistent with GAAP. Two 
FICUs and two leagues also questioned the necessity of a formal 
regulation for this requirement because, for years, it has been the 
industry standard to terminate the accrual of interest when a loan is 
90 days delinquent. The commenters argued that the proposal is 
redundant and it is therefore unnecessary to include this standard 
practice in a regulation. They contend that NCUA could better handle 
exceptions to this nonaccrual approach through the examination and 
supervision process. While recognizing the practice has been 
longstanding in the industry, the Board believes that memorializing the 
practice as a rule, ensures ongoing, consistent and appropriate income 
recognition for loans that are past due by 90 days or more. In 
addition, the rule enables the agency to enforce noncompliance if 
necessary.
    One FICU and one league stated there is great disparity in FICUs' 
computer systems in dealing with the 90-day policy, specifically that 
some FICUs time the policy to 90 days while others time the policy to 
91 or more days. The FICU commenter noted a difference in practice as 
to whether accrued interest is reversed when it goes into nonaccrual 
status or if there actually is no additional interest accrued to the 
general ledger prospectively. The final IRPS clarifies that the 
nonaccrual policy applies when the loan is 90 days or more past due. In 
response to the FICU commenter, the final IRPS also clarifies that when 
accrued interest is reversed, the reversed interest cannot be 
subsequently restored but can only be recognized as income if it is 
collected in cash or cash equivalents, and that there is no additional 
accrual until restoral to accrual conditions are met. This approach is 
consistent both with GAAP principles governing interest recognition on 
loans and longstanding banking industry practice.
    One league requested that the final rule clarify that placing a 
loan on nonaccrual status does not change the loan agreement or the 
obligations between the borrower and the FICU, unless and until the 
parties reach express agreement on modifying the original loan terms. 
The commenter expressed concern that the final rule will be perceived 
as forgiveness of interest or principal or any type of right to a 
modification conferred to the borrower. To address this concern, the 
final IRPS includes a footnote to make clear that the accounting 
procedure to place a loan on nonaccrual status has no impact on the 
borrower's contractual obligation to the FICU.

c. Restoration of Member Business Workout Loans to Accrual

    Thirteen FICUs and eight leagues stated they saw no justification 
for treating MBLs differently than consumer/residential loans. They 
objected to the proposal's continuation of the current requirement that 
MBLs remain in nonaccrual status until a FICU receives six consecutive 
payments under modified loan terms. One commenter questioned the 
application of the proposal to all MBLs given that not all MBLs are 
commercial real estate loans. Two FICUs stated that this provision 
contradicts GAAP. Two commenters misunderstood the Board's remedy to 
past due reporting of all loans, including MBLs, and argued that the 
proposal's treatment of MBLs will artificially inflate delinquency. The 
differentiation the rule makes between MBLs and other loans regards 
provisions for restoration to accrual status, not delinquency 
reporting. Past due reporting will now be consistent with loan contract 
terms for all loans including MBLs. One commenter stated that, in 
general, MBL portfolios are comprised of a pool of individually unique 
loans with different collateral terms and repayment capabilities based 
on the financial situation and creditworthiness of the borrower/
guarantor. As such, the commenter felt it was inappropriate to 
establish a six-month standard that would uniformly apply to a pool of 
individually unique loans. The commenter argued that the determination 
to place an MBL back into accrual status should be based on the 
individual financial circumstances of the borrower rather than an 
arbitrary period of time. One industry trade group also strongly urged 
NCUA to provide consistent relief for consumer loan and MBL workouts. 
It stated that the proposal perpetuates an unnecessary obstacle for 
FICUs to accommodate business members. Another trade group opposed the 
proposed treatment of MBLs because it is not required by the Federal 
Credit Union Act or GAAP. One FICU, six leagues, and one trade group 
stated that the tracking of MBLs as proposed would continue the burden 
of manually tracking these loans, thus imposing an additional barrier 
to making MBLs.
    The Board considered the commenters' concerns but retained the 
proposed provisions for the restoration of MBL workout loans to accrual 
status in the final rule. In drafting the NPRM, NCUA weighed requiring 
identical treatment of both consumer and MBL workouts, i.e., the FICU 
would need to demonstrate a period of member repayment performance of 
six consecutive payments before the return to accrual status. In the 
interest of providing FICUs reduced burden without undue increased 
supervisory risk, the Board limited the more stringent requirement to 
only MBL workout loans. The Board's decision to retain the NPRM's 
proposed requirements for restoring MBL workout loans to accrual status 
is threefold: (1) The principle forming the basis for the provision is 
found in GAAP; (2) NCUA has previously joined the other federal 
regulators in advancing this provision in multiple interagency policy 
issuances, and (3) the requirement is a longstanding accepted banking 
practice.
    One commenter encouraged NCUA to specifically define ``consecutive 
payment'' or give FICUs the authority to define the term in loan 
workout policies. Similarly, another FICU suggested that a payment made 
within a 30-day window of the due date (i.e., no late payments) be 
considered consecutive. This commenter also asked for clarification on 
what constitutes a payment for this purpose (e.g., principal and 
interest, principal only, or interest only) to ensure consistent 
reporting among FICUs. To clarify, a FICU is required to use the Cash 
Basis method of income recognition in GAAP until the borrower makes six 
consecutive timely payments of principal and interest consistent with 
the loan contract terms. The Board has clarified in the final IRPS that 
repayment performance involves timely payments of principal and 
interest under the restructured loan's terms.
    One FICU, while agreeing with the proposal's requirement for 
maintaining certain MBLs in nonaccrual status for safety and soundness 
reasons, objected to extending the policy to multi-family residential 
mortgages. The commenter suggested that loans secured by 1-4 family 
residential properties, which fall into NCUA's MBL definition for other 
purposes, follow the proposal's non-MBL requirements for restoration to 
accrual status.
    One FICU offered a slight modification to the proposed rule by 
expanding it to ``greater than 90 days and/or 3 months past due.'' It 
argued that many FICUs currently label internal reports as ``90 day,'' 
but upon a closer analysis of the actual technical format of FICUs' 
core processors, some FICUs would change the label to ``3 months.'' The 
final rule and IRPS maintain the uniform standard of 90 days or more.
    One FICU requested clarification that MBL workout loans on 
nonaccrual

[[Page 31997]]

status would not be considered delinquent for reporting purposes if the 
borrowers have made payments conforming to a loan workout but have not 
completed the 6-month period to resume accruals. The Board notes that 
past due status and nonaccrual are separate elements. The final IRPS, 
as proposed, is clear that past due status is remedied at the time of 
restructure regardless of the nonaccrual requirement.
    One FICU requested that NCUA clarify its ``broad'' statement in the 
guidance that ``in no event should the credit union authorize 
additional advances to finance unpaid interest and fees,'' or eliminate 
the language altogether. The commenter stated that a FICU could 
interpret this language to suggest that the payment of a third-party 
fee could not be added to the collectible loan balance when attempting 
to recover losses. The commenter stated that its ability to capitalize 
interest at the point of restructure is an important tool in providing 
solutions to troubled borrowers. By mandating the acceptance of greater 
losses, NCUA would be inadvertently increasing risk in the area of 
safety and soundness, and possibly eliminating a viable member solution 
by ultimately creating too great a loss. The Board agrees such third-
party fees should not hinder sound restructure decisions. Accordingly, 
the final IRPS includes new language to clarify that, while a FICU 
cannot make additional advances to the borrower to finance unpaid 
interest and credit union fees, it may make advances to cover third-
party fees exclusive of credit union commissions, such as forced place 
insurance or property taxes.

d. Regulatory Reporting of Workout Loans, Including TDRs

    Thirteen FICUs, an accounting firm, a non-profit consumer advocate, 
the state supervisory organization, eight leagues, and two industry 
trade groups supported the elimination of the current requirement to 
track and report TDRs as delinquent until six consecutive payments. 
Several commenters noted the change is a needed improvement, as the 
current reporting requirement has been problematic for many FICUs and 
an obstacle to helping members. The consumer advocate stated that by 
moving to more commonsense reporting, the proposal eliminates a 
disincentive for a FICU to consider TDRs, which in turn will result in 
fewer foreclosures. One FICU commenter also stated that the current 
requirements have been quite cumbersome and contrary in purpose to the 
FICU's efforts to keep members in their homes and avoid unnecessary 
foreclosure actions.
    Several commenters believed that NCUA should enable FICUs to 
perform appropriate loan restructurings without a reporting treatment 
that has a chilling effect on this essential business decision during a 
period of economic downturn, particularly in hard hit states. Two 
commenters stated that FICUs overstate their true delinquencies under 
the current reporting process. One commenter stated that if 
institutions follow sound workout loan policies in which the borrower 
has a better capability and willingness to repay, then the TDR should 
be treated as performing under the new terms of the loan agreement. To 
pretend a loan is delinquent for six months based on the original past 
due date distorts the true delinquency of loans in the portfolio. One 
commenter noted that the overstatement of delinquencies causes 
unnecessary concern with counterparties and creates an ``apples to 
oranges'' comparison with other financial institutions because banks do 
not report TDRs as delinquent.
    In support of the proposal, one FICU and one league noted that 
FICUs have developed elaborate tracking systems. They stated, however, 
that dual reporting systems have resulted in different financial 
reporting for internal and audited financial statements from that used 
in Call Reports. These differences have resulted in confusion. One of 
these commenters suggested that the new guidance caution FICUs that, 
when modifying loans and removing them from delinquency status, 
documentation of the borrower's ability to pay under the modified terms 
should include a thorough analysis of recent past payment performance 
with strong consideration of the immediately preceding three months. 
This commenter suggested that the guidance should limit to two the 
number of times during a 12-month period that a loan may be formally 
modified with a reset of the delinquency counters. This limitation 
would allow for tracking (without dual reporting) and prevent FICUs 
from masking true delinquency through continuous modifications. The 
commenter stated that data tracking should focus on: (1) Current levels 
of delinquency under restructured loan terms; (2) number and dollar 
amount of new TDRs modified during the quarter/year; (3) number and 
amount of current TDRs in the portfolio and reserves in the ALLL for 
TDRs; and (4) number and dollar amount of TDRs currently in the 
portfolio that have been formally restructured where the delinquency 
counters have re-set more than once during the last 12-month period to 
identify loans that have been rolled. The Board will consider these 
suggestions when it modifies the Call Report.
    One FICU recommended that the final rule impose stricter monitoring 
and reporting of TDRs. It offered one example, which is a requirement 
for FICUs to track and report TDRs that are 30 days delinquent under 
the restructured terms.
    Many commenters noted confusion in the industry and among 
examination staff about what makes a modified loan a TDR. Commenters 
suggested that NCUA refrain from using ``workout loan'' and ``TDR'' 
interchangeably, stating that all workout loans are not TDRs. They 
recommended that the proposal be restricted to TDRs to avoid confusion. 
Another commenter requested that, if the term ``workouts'' has any 
applicability in the final rule, a definition should clarify the 
materiality or significance of the loan term changes before the loan is 
deemed a ``workout.'' Two commenters stated that NCUA's definition of 
``TDR'' is not consistent with FASB and suggested that NCUA review FASB 
Accounting Standards Update No. 2011-02, ``A Creditor's Determination 
of Whether a Restructuring Is a Troubled Debt Restructuring'' for 
clarification. One FICU and a league asked NCUA to consider detailed 
standards for FICUs and examiners to determine which loan modifications 
qualify as TDRs. Similarly, one FICU noted that the proposal shifts 
documentation requirements from TDRs to workout loans. It further noted 
that GAAP allows for some workout loans to be immaterial and non-
reportable as TDRs if they satisfy ``insignificant'' criteria. The 
commenter, therefore, suggested that the rule apply only to TDRs and 
not to workout loans that do not meet the materiality component of 
GAAP. The Board plans to direct staff to develop supervisory guidance 
to examiners that will incorporate current agency regulatory and 
examination approaches and address many of these areas that have caused 
confusion in implementation. Staff will consider commenters concerns in 
drafting the supervisory guidance. The supervisory guidance will be 
provided to the credit union industry as well. However, the Board has 
determined the final rule language will continue to incorporate both 
the term ``TDR'' and the broader term ``workout'' in the final rule, 
both of which are defined in the IRPS glossary.
    Three leagues, one trade group, and two FICUs objected to the 
proposal's statement ``that in an economic

[[Page 31998]]

downturn absent contrary supportable information workout loans are 
TDRs.'' The commenters stated that this language only perpetuates 
confusion about what constitutes a TDR and is inconsistent with the 
definition of TDR in GAAP. One commenter stated that economic climate 
should not be the barometer of how a TDR is defined. Another commenter 
asked NCUA to address the definition of ``economic downturn'' and 
``contrary supportable information,'' as well as what happens to 
modified loans in an environment that is not an economic downturn. One 
league urged NCUA to ensure that its glossary definitions are 
consistent with GAAP and to eliminate the ``economic downturn'' 
language and simply adopt the GAAP definition of TDR. The Board notes 
that in the NPRM, the proposed IRPS explicitly stated that ``[u]nder 
this IRPS, TDR loans are as defined in generally accepted accounting 
principles (GAAP) and the Board does not intend through this policy to 
change the Financial Accounting Standards Board's (FASB) definition of 
TDR in any way.'' 77 FR at 4933. Furthermore, it tracked GAAP in 
defining TDR in the glossary. The NPRM also urged FICUs to consider 
FASB clarifications in their recently revised, Accounting Standards 
Update No. 2011-02 (April 2011) to the FASB Accounting Standards 
Codification entitled, Receivables (Topic 310), ``A Creditor's 
Determination of Whether a Restructuring is a Troubled Debt 
Restructuring.'' The Board believes it is clear that the rule's focus 
is on restructures that meet the GAAP definition of TDR. When a FICU 
works with members in financial difficulty and grants term concessions 
as described in GAAP, the FICU will have TDRs to report in its 
regulatory reports. Working with members is consistent with its 
mission. Particularly in downward economic cycles, the need to work 
with members increases, thus the increase in restructuring strategies 
to serve members. As such, the Board acknowledges the value of TDRs. If 
a FICU enters into TDR arrangements that improve the collectability of 
loans, properly recognizes loan losses, and restores the loans to 
accrual status, the FICU has met its mission and its regulatory 
reporting burden. Risk is mitigated, achieving a goal desired by both 
NCUA and the FICU.
    Two leagues and one trade group requested that the final rule 
include additional guidance, consistent with GAAP, on impairment 
testing and recognition requirements. Impairment testing is beyond the 
scope of this rulemaking, the Board refers to IRPS 02-1, ``Allowance 
for Loan and Lease Losses Methodologies and Documentation for Federally 
Insured Credit Unions,'' and NCUA's Accounting Bulletin No. 06-01 
(December 2006) that transmits the 2006 Interagency ALLL Policy 
Statement for further information.

III. Final Rule and IRPS

a. Section 741.3, Lending Policies

    The final rule amends Sec.  741.3(b)(2) to require FICUs to adopt 
policies that govern loan workout arrangements and nonaccrual 
practices. The rule specifically requires that a FICU's written 
nonaccrual standards include the discontinuance of interest accrual on 
loans that are past due by 90 days or more and requirements for 
returning such loans, including MBLs workouts, to accrual status.
    To set NCUA's supervisory expectations and assist FICUs in 
complying with the amendments to Sec.  741.3(b)(2), the final rule 
includes an appendix to Part 741. The appendix thoroughly addresses the 
loan workout account management and reporting standards FICUs must 
implement in order to comply with the rule. It also explains how FICUs 
report their data collections related to TDRs on Call Reports. The 
contents of the appendix are described in detail below.

b. Appendix C to Part 741, Interpretive Ruling and Policy Statement on 
Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled 
Debt Restructured Loans

1. Written Loan Workout Policy and Monitoring Requirements
    The Board recognizes loan workouts can be used to help borrowers 
overcome temporary financial difficulties, such as loss of job, medical 
emergency, or change in family circumstances like loss of a family 
member. The Board further acknowledges that the lack of a sound workout 
policy can mask the true performance and past due status of the loan 
portfolio. Accordingly, the final rule requires the FICU board and 
management to adopt and adhere to an explicit written policy and 
standards that control the use of loan workouts, and establish controls 
to ensure the policy is consistently applied. The loan workout policy 
and practices should be commensurate with each credit union's size and 
complexity, and must be in line with the credit union's broader risk 
mitigation strategies.
    The policy must define eligibility requirements (i.e., under what 
conditions the FICU will consider a loan workout), including 
establishing limits on the number of times an individual loan may be 
modified.\2\ The policy must ensure the FICU makes loan workout 
decisions based on the borrower's renewed willingness and ability to 
repay the loan. In addition, the policy must establish sound controls 
to ensure loan workout actions are appropriately structured, including 
a prohibition against any authorizations of additional advances to 
finance unpaid interest and credit union fees. The final IRPS does 
provide that the policy may allow a FICU to make advances to cover 
third-party fees, such as force-placed insurance or property taxes. The 
FICU, however, cannot finance any related commissions it may receive 
from the third party.
---------------------------------------------------------------------------

    \2\ Broad based credit union programs commonly used as a member 
benefit and implemented in a safe and sound manner limited to only 
accounts in good standing, such as Skip-a-Pay programs, are not 
intended to count toward these limits.
---------------------------------------------------------------------------

    Furthermore, the Board believes loan workouts should be adequately 
controlled and monitored by the board of directors and management, and 
therefore requires the decision to re-age, extend, defer, renew, or 
rewrite a loan, like any other revision to contractual terms, be 
supported by the FICU's management information systems. Sound 
management information systems are able to identify and document any 
loan that is re-aged, extended, deferred, renewed, or rewritten, 
including the frequency and extent such action has been taken. 
Appropriate documentation typically shows that the FICU's personnel 
communicated with the borrower, the borrower agreed to pay the loan in 
full, and the borrower has the ability to repay the loan under the new 
terms.
    NCUA is concerned, however, about restructuring activity that 
pushes existing losses into future reporting periods without improving 
the loan's collectability. The final IRPS includes a provision 
notifying FICUs that if they engage in restructuring activity on a loan 
that results in restructuring a loan more often than once a year or 
twice in five years, examiners will have higher expectations for the 
documentation of the borrower's renewed willingness and ability to 
repay the loan. Examiners will ask FICUs to provide evidence that their 
policy of permitting multiple restructurings improve collectability.
    In developing a written policy, the FICU board and management may 
wish to consider similar parameters as those established in the FFIEC's 
``Uniform Retail Credit Classification and Account Management Policy'' 
(FFIEC Policy). 65 FR 36903 (June 12, 2000). The FFIEC

[[Page 31999]]

Policy sets forth specific limitations on the number of times a loan 
can be re-aged (for open-end accounts) or extended, deferred, renewed 
or rewritten (for closed-end accounts). Additionally, LCU 09-CU-19, 
``Evaluating Residential Real Estate Mortgage Loan Modification 
Programs,'' outlines policy requirements for real estate modifications. 
Those requirements remain applicable to real estate loan modifications 
but could be adapted in part by the FICU in its written loan workout 
policy for other loans.
    The Board does not intend for these minimum requirements to be an 
all inclusive list, rather they provide a basic framework within which 
to establish a sound loan workout program.
2. Regulatory Reporting of Workout Loans Including TDR Past Due Status
    The Board recognizes that loan workouts that qualify under GAAP as 
TDRs require special financial reporting considerations. The final IRPS 
mandates that the past due status of all loans should be calculated 
consistent with loan contract terms, including amendments made to loan 
terms through a formal restructure. The IRPS eliminates the current, 
dual, and often manual delinquency tracking burden on FICUs managing 
and reporting TDR loans, while instituting a nonaccrual policy on TDR 
loans apart from past due status. The Board will modify the Call Report 
instructions accordingly.
    Additionally, the final IRPS institutes revised Call Report data 
collections related to loan workouts eliminating much of the current 
data collections on the broad category ``loan modifications,'' focusing 
data collection on TDR loans. The Board will add additional data 
elements as necessary to effectively monitor and measure TDR activity 
and corresponding risk to the NCUSIF. This will assist national and 
field examination and supervision staff both to detect the level of 
activity and possible overuse of reworking a nonperforming loan 
multiple times without improving overall collectability, and will 
ensure income recognition is appropriate.
3. Loan Nonaccrual Policy
    Generally, NCUA has required,\3\ and it has become accepted credit 
union practice, to cease accruing interest on a loan when it becomes 90 
days or more past due. The existing approach is referenced in various 
letters and publications but currently is not memorialized or 
enforceable through any statute or regulation. The final rule and IRPS 
require a FICU to adopt written nonaccrual policies that specifically 
address the discontinuance of interest accrual on loans past due by 90 
days or more, as well as the requirements for returning such loans 
(including member business loan workouts) to accrual status.
---------------------------------------------------------------------------

    \3\ The policy was discussed in an obsolete version of the NCUA 
Accounting Manual for FCUs, last published in June 1995.
---------------------------------------------------------------------------

Nonaccrual Status

    The final IRPS specifies when FICUs must place loans in nonaccrual 
status, including the reversal of previously accrued but uncollected 
interest, sets the conditions for restoration of a nonaccrual loan to 
accrual status, and discusses the criteria under GAAP for Cash or Cost 
Recovery basis of income recognition. FICUs may not accrue interest on 
any loan upon which principal or interest has been in default for a 
period of 90 days or more, unless the loan is both ``well secured'' and 
``in the process of collection.'' Additionally, FICUs must place loans 
in nonaccrual status if maintained on a Cash (or Cost Recovery) basis 
because of deterioration in the financial condition of the borrower, or 
for which payment in full of principal or interest is not expected. The 
IRPS also addresses the treatment of cash interest payments received 
during periods of loan nonaccrual and prohibits the restoration of 
previously reversed or charged-off accrued, but uncollected, interest 
applicable to any loan placed in nonaccrual status.

Restoration to Accrual Status (not Including Member Business Loan 
Workouts)

    The final IRPS sets forth specific parameters for returning a 
nonaccrual loan to accrual.
    A nonaccrual loan may be returned to accrual status when:
     Its past due status is less than 90 days, GAAP does not 
require it to be maintained on the Cash or Cost Recovery basis, and the 
credit union is plausibly assured of repayment of the remaining 
contractual principal and interest within a reasonable period;
     When it otherwise becomes well secured and in the process 
of collection; or
     The asset is a purchased impaired loan and it meets the 
criteria under GAAP for accrual of income under the interest method 
specified therein.
    In restoring all loans to accrual status, if any interest payments 
received while the loan was in nonaccrual status were applied to reduce 
the recorded investment in the loan the application of these payments 
to the loan's recorded investment must not be reversed (and interest 
income must not be credited). Likewise, accrued but uncollected 
interest reversed or charged off at the point the loan was placed on 
nonaccrual status cannot be restored to accrual; it can only be 
recognized as income if collected in cash or cash equivalents from the 
member.

Restoration to Accrual Status on Member Business Loan Workouts

    The Board recognizes there are unique circumstances governing the 
restoration of accrual for member business loan workouts and has set 
forth a separate policy in the proposal. This policy is largely derived 
from the ``Interagency Policy Statement on Prudent Commercial Real 
Estate Loan Workouts'' that NCUA and the other financial regulators 
issued on October 30, 2009.\4\ The final IRPS requires a formally 
restructured member business loan workout to remain in nonaccrual 
status until the FICU can document a current credit evaluation of the 
borrower's financial condition and prospects for repayment under the 
revised terms. 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.
---------------------------------------------------------------------------

    \4\ See Interagency Policy Statement on Prudent Commercial Real 
Estate Loan Workouts (October 30, 2009) transmitted by Letter to 
Credit Unions No. 10-CU-07, and available at https://www.ncua.gov.
---------------------------------------------------------------------------

    A sustained period of repayment performance would be a minimum of 
six consecutive timely payments under the restructured loan's terms of 
principal and interest in cash or cash equivalents. In returning the 
member business workout loan to accrual status, sustained historical 
repayment performance for a reasonable time prior to the restructuring 
may be taken into account. Such a restructuring must improve the 
collectability of the loan in accordance with a reasonable repayment 
schedule and does not relieve the FICU from the responsibility to 
promptly charge off all identified losses.
4. Glossary
    The final section of the IRPS is a glossary of terms used 
throughout.
    To assist commenters in understanding existing agency guidance, the 
following illustration is provided:

[[Page 32000]]



  Summary of Source Guidance Related to Lending and Loan Modifications
------------------------------------------------------------------------
    Source of supervisory                              Member business
          guidance              Consumer lending           lending
------------------------------------------------------------------------
Existing Recent Supervisory   Letter to Credit      Letter to Credit
 Guidance on Lending and/or    Union 11-CU-01,       Unions 10-CU-07,
 Loan Modifications.           Residential           Commercial Real
                               Mortgage              Estate Loan
                               Foreclosure           Workouts,
                               Concerns, (January    transmitting
                               2011) https://         Interagency Policy
                               www.ncua.gov.         Statement on
                              Letter to Credit       Prudent Commercial
                               Unions 09-CU-19,      Real Estate Loan
                               Evaluating            Workouts, (June
                               Residential Real      2010), and
                               Estate Mortgage       Enclosure https://
                               Loan Modification     www.ncua.gov
                               Programs,            Letter to Credit
                               (September 2009)      Unions 10-CU-02,
                               https://www.ncua.gov.  Current Risks in
                              Federal Financial      Business Lending
                               Regulatory Agencies   and Sound Risk
                               Issue Statement In    Management
                               Support of the        Practices,
                               ``Making Home         (February 2010)
                               Affordable'' Loan     https://
                               Modification          www.ncua.gov.
                               Program,'' (March
                               2009) https://www.ncua.gov.
                              Statement on Loss
                               Mitigation
                               Strategies for
                               Servicers of
                               Residential
                               Mortgages,
                               (September 2007)
                               https://www.ncua.gov..
Written Policy Requirement    Final IRPS, Appendix  Final IRPS, Appendix
 on Frequency of               C of Part 741.        C of Part 741 and
 Modifications.                                      Letter to Credit
                                                     Unions 10-CU-07,
                                                     Commercial Real
                                                     Estate Loan
                                                     Workouts,
                                                     transmitting
                                                     Interagency Policy
                                                     Statement on
                                                     Prudent Commercial
                                                     Real Estate Loan
                                                     Workouts, (June
                                                     2010) and Enclosure
                                                     https://www.ncua.gov.
                             -------------------------------------------
Nonaccrual..................  Final IRPS, Appendix C of Part 741.
Delinquency.................  Final IRPS, Appendix C of Part 741.
Allowance for Loan and Lease  IRPS 02-3, Allowance for Loan and Lease
 Losses.                       Losses Methodologies and Documentation
                               for Federally-Insured Credit
                               Unions (May 2002), https://www.ncua.gov.
                              2006 Interagency ALLL Policy Statement
                               transmitted by Accounting Bulletin 06-1
                               (December 2006),
                               https://www.ncua.gov.
Charge-offs.................  Letter to Credit Unions No. 03-CU-01, Loan
                               Charge-off Guidance (January 2003), and
                               its Enclosure,
                               https://www.ncua.gov.
------------------------------------------------------------------------

IV. Regulatory Procedures

a. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact agency rulemaking may have 
on a substantial number of small credit unions, defined as those under 
ten million dollars in assets. This rule tightens loan account 
management processes that should already be in place in FICUs. While 
FICUs are required to have policies that address loan management 
protocols, the final rule and IRPS set additional parameters that are 
consistent with existing best practices and federal banking regulators' 
policies. NCUA has determined this final rule will not have a 
significant impact on a substantial number of small credit unions so 
NCUA is not required to conduct a Regulatory Flexibility Analysis.

b. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part 
1320. For purposes of the PRA, a paperwork burden may take the form of 
either a reporting or a recordkeeping requirement, both referred to as 
information collections. As required, NCUA has applied to the Office of 
Management and Budget (OMB) for approval of the information collection 
requirement described below.
    The final rule contains an information collection in the form of a 
written policy requirement. Any FICU making loan workout arrangements 
that assist borrowers must have a written policy to govern this 
activity. FICUs will only need to modify current policies to include 
any additional parameters established in the rule. It is therefore 
NCUA's view that implementing this type of policy will create minimum 
burden to credit unions. The parameters established within the rule and 
IRPS are usual and customary operating practices of a prudent financial 
institution. In the proposed rule, NCUA estimated it should take a FICU 
an average of 8 hours to modify current policies to comply with the 
parameters set forth in the proposed IRPS. Therefore, the total initial 
burden imposed to 7,250 FICUs for modifying the policies is 
approximately 58,000 hours. NCUA further estimated a FICU spends on 
average 15 minutes per month manually calculating and reporting past 
due status on each TDR loan. This policy eliminates this requirement. 
Per the September 30, 2011, Call Report, FICUs have 150,453 TDR loans 
outstanding. Eliminating this reporting requirement therefore results 
in an annual savings of 451,359 hours. Thus, on net, this policy 
results in a substantial hours (393,359 annually) reduction of 
regulatory burden.
    OMB assigned No. 3133-XXXX to this rulemaking.

c. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

d. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on state and local 
interests. NCUA, an independent regulatory agency as defined in 44 
U.S.C. 3502(5), voluntarily complies with the executive order to adhere 
to fundamental federalism principles. This final rule applies to all 
FICUs but will not have a substantial direct effect on the states, on 
the relationship between the national government and the states, or on 
the distribution of power and

[[Page 32001]]

responsibilities among the various levels of government. NCUA has 
determined that this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

e. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects in 12 CFR Part 741

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on May 24, 
2012.
Mary F. Rupp,
Secretary of the Board.
    For the reasons discussed above, NCUA amends 12 CFR part 741 as 
follows:

PART 741--REQUIREMENTS FOR INSURANCE

0
1. The authority citation for part 741 continues to read:

    Authority:  12 U.S.C. 1757, 1766(a), 1781-1790 and 1790d; 31 
U.S.C. 3717.

0
2. In Sec.  741.3, revise paragraph (b)(2) to read as follows:


Sec.  741.3  Criteria.

* * * * *
    (b) * * *
    (2) The existence of written lending policies, including adequate 
documentation of secured loans and the protection of security interests 
by recording, bond, insurance or other adequate means, adequate 
determination of the financial capacity of borrowers and co-makers for 
repayment of the loan, adequate determination of value of security on 
loans to ascertain that said security is adequate to repay the loan in 
the event of default, loan workout arrangements, and nonaccrual 
standards that include the discontinuance of interest accrual on loans 
past due by 90 days or more and requirements for returning such loans, 
including member business loans, to accrual status.
* * * * *

0
3. Add Appendix C to read as follows:

Appendix C to Part 741--Interpretive Ruling and Policy Statement on 
Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled 
Debt Restructured Loans

    This Interpretive Ruling and Policy Statement (IRPS) establishes 
requirements for the management of loan workout \1\ arrangements, 
loan nonaccrual, and regulatory reporting of troubled debt 
restructured loans (herein after referred to as TDR or TDRs).
---------------------------------------------------------------------------

    \1\ Terms defined in the Glossary will be italicized on their 
first use in the body of this guidance.
---------------------------------------------------------------------------

    This IRPS applies to all federally insured credit unions.
    Under this IRPS, TDR loans are as defined in generally accepted 
accounting principles (GAAP) and the Board does not intend through 
this policy to change the Financial Accounting Standards Board's 
(FASB) definition of TDR in any way. In addition to existing agency 
policy, this IRPS sets NCUA's supervisory expectations governing 
loan workout policies and practices and loan accruals.

Written Loan Workout Policy and Monitoring Requirements \2\
---------------------------------------------------------------------------

    \2\ For additional guidance on member business lending 
extension, deferral, renewal, and rewrite policies, see Interagency 
Policy Statement on Prudent Commercial Real Estate Loan Workouts 
(October 30, 2009) transmitted by Letter to Credit Unions No. 10-CU-
07, and available at https://www.ncua.gov.
---------------------------------------------------------------------------

    For purposes of this policy statement, types of workout loans to 
borrowers in financial difficulties include re-agings, extensions, 
deferrals, renewals, or rewrites. See the Glossary entry on 
``workouts'' for further descriptions of each term. Borrower 
retention programs or new loans are not encompassed within this 
policy nor considered by the Board to be workout loans.
    Loan workouts can be used to help borrowers overcome temporary 
financial difficulties, such as loss of job, medical emergency, or 
change in family circumstances like loss of a family member. Loan 
workout arrangements should consider and balance the best interests 
of both the borrower and the credit union.
    The lack of a sound written policy on workouts can mask the true 
performance and past due status of the loan portfolio. Accordingly, 
the credit union board and management must adopt and adhere to an 
explicit written policy and standards that control the use of loan 
workouts, and establish controls to ensure the policy is 
consistently applied. The loan workout policy and practices should 
be commensurate with each credit union's size and complexity, and 
must be in line with the credit union's broader risk mitigation 
strategies. The policy must define eligibility requirements (i.e. 
under what conditions the credit union will consider a loan 
workout), including establishing limits on the number of times an 
individual loan may be modified.\3\ The policy must also ensure 
credit unions make loan workout decisions based on the borrower's 
renewed willingness and ability to repay the loan. If a credit union 
engages in restructuring activity on a loan that results in 
restructuring the loan more often than once a year or twice in five 
years, examiners will have higher expectations for the documentation 
of the borrower's renewed willingness and ability to repay the loan. 
NCUA is concerned about restructuring activity that pushes existing 
losses into future reporting periods without improving the loan's 
collectability. One way a credit union can provide convincing 
evidence that multiple restructurings improve collectability is to 
perform validation of completed multiple restructurings that 
substantiate the claim. Examiners will ask for such validation 
documentation if the credit union engages in multiple restructurings 
of a loan.
---------------------------------------------------------------------------

    \3\ Broad based credit union programs commonly used as a member 
benefit and implemented in a safe and sound manner limited to only 
accounts in good standing, such as Skip-a-Pay programs, are not 
intended to count toward these limits.
---------------------------------------------------------------------------

    In addition, the policy must establish sound controls to ensure 
loan workout actions are appropriately structured.\4\ The policy 
must provide that in no event may the credit union authorize 
additional advances to finance unpaid interest and credit union 
fees. The credit union may, however, make advances to cover third-
party fees, excluding credit union commissions, such as force-placed 
insurance or property taxes. For loan workouts granted, the credit 
union must document the determination that the borrower is willing 
and able to repay the loan.
---------------------------------------------------------------------------

    \4\ In developing a written policy, the credit union board and 
management may wish to consider similar parameters as those 
established in the FFIEC's ``Uniform Retail Credit Classification 
and Account Management Policy'' (FFIEC Policy). 65 FR 36903 (June 
12, 2000). The FFIEC Policy sets forth specific limitations on the 
number of times a loan can be re-aged (for open-end accounts) or 
extended, deferred, renewed or rewritten (for closed-end accounts). 
Additionally, NCUA Letter to Credit Unions (LCU) 09-CU-19, 
``Evaluating Residential Real Estate Mortgage Loan Modification 
Programs,'' outlines policy requirements for real estate 
modifications. Those requirements remain applicable to real estate 
loan modifications but could be adapted in part by the credit union 
in their written loan workout policy for other loans.
---------------------------------------------------------------------------

    Management must ensure that comprehensive and effective risk 
management and internal controls are established and maintained so 
that loan workouts can be adequately controlled and monitored by the 
credit union's board of directors and management, to provide for 
timely recognition of losses,\5\ and to permit review by examiners. 
The credit union's risk management framework must include thresholds 
based on aggregate volume of loan workout activity that trigger 
enhanced reporting to the board of directors. This reporting will 
enable the credit union's board of directors to evaluate the 
effectiveness of the credit union's loan workout program, any 
implications to the organization's financial condition, and to make 
any compensating adjustments to the overall business strategy.

[[Page 32002]]

This information will also then be available to examiners upon 
request.
---------------------------------------------------------------------------

    \5\ Refer to NCUA guidance on charge-offs set forth in LCU 03-
CU-01, ``Loan Charge-off Guidance,'' dated January 2003. Examiners 
will require that a reasonable written charge-off policy is in place 
and that it is consistently applied. Additionally, credit unions 
need to adjust historical loss factors when calculating ALLL needs 
for pooled loans to account for any loans with protracted charge-off 
timeframes (e.g., 12 months or greater). See discussions on the 
latter point in the 2006 Interagency ALLL Policy Statement 
transmitted by Accounting Bulletin 06-1 (December 2006).
---------------------------------------------------------------------------

    To be effective, management information systems need to track 
the principal reductions and charge-off history of loans in workout 
programs by type of program. Any decision to re-age, extend, defer, 
renew, or rewrite a loan, like any other revision to contractual 
terms, needs to be supported by the credit union's management 
information systems. Sound management information systems are able 
to identify and document any loan that is re-aged, extended, 
deferred, renewed, or rewritten, including the frequency and extent 
such action has been taken. Documentation normally shows that the 
credit union's personnel communicated with the borrower, the 
borrower agreed to pay the loan in full under any new terms, and the 
borrower has the ability to repay the loan under any new terms.

Regulatory Reporting of Workout Loans Including TDR Past Due Status

    The past due status of all loans will be calculated consistent 
with loan contract terms, including amendments made to loan terms 
through a formal restructure. Credit unions will report delinquency 
on the Call Report consistent with this policy.\6\
---------------------------------------------------------------------------

    \6\ Subsequent Call Reports and accompanying instructions will 
reflect this policy, including focusing data collection on loans 
meeting the definition of TDR under GAAP. In reporting TDRs on 
regulatory reports, the data collections will include all TDRs that 
meet the GAAP criteria for TDR reporting, without the application of 
materiality threshold exclusions based on scoping or reporting 
policy elections of credit union preparers or their auditors. Credit 
unions should also refer to the recently revised standard from the 
FASB, Accounting Standards Update No. 2011-02 (April 2011) to the 
FASB Accounting Standards Codification entitled, Receivables (Topic 
310), ``A Creditor's Determination of Whether a Restructuring is a 
Troubled Debt Restructuring.'' This clarified the definition of a 
TDR, which has the practical effect in the current economic 
environment to broaden loan workouts that constitute a TDR. This 
standard is effective for annual periods ending on or after December 
15, 2012.
---------------------------------------------------------------------------

Loan Nonaccrual Policy

    Credit unions must ensure appropriate income recognition by 
placing loans in nonaccrual status when conditions as specified 
below exist, reversing or charging-off previously accrued but 
uncollected interest, complying with the criteria under GAAP for 
Cash or Cost Recovery basis of income recognition, and following the 
specifications below regarding restoration of a nonaccrual loan to 
accrual status.\7\ This policy on loan accrual is consistent with 
longstanding credit union industry practice as implemented by the 
NCUA over the last several decades. The balance of the policy 
relates to member business loan workouts and is similar to the FFIEC 
policies adopted by the federal banking agencies \8\ as set forth in 
the FFIEC Call Report for banking institutions and its 
instructions.\9\
---------------------------------------------------------------------------

    \7\ Placing a loan in nonaccrual status does not change the loan 
agreement or the obligations between the borrower and the credit 
union. Only the parties can effect a restructuring of the original 
loan terms or otherwise settle the debt.
    \8\ The federal banking agencies are the Board of Governors of 
the Federal Reserve System, the Federal Deposit Insurance 
Corporation, and the Office of the Comptroller of the Currency.
    \9\ FFIEC Report of Condition and Income Forms and User Guides, 
Updated September 2011, https://www.fdic.gov.
---------------------------------------------------------------------------

Nonaccrual Status

    Credit unions may not accrue interest \10\ on any loan upon 
which principal or interest has been in default for a period of 90 
days or more, unless the loan is both ``well secured'' and ``in the 
process of collection.'' \11\ Additionally, loans will be placed in 
nonaccrual status if maintained on a Cash (or Cost Recovery) basis 
because of deterioration in the financial condition of the borrower, 
or for which payment in full of principal or interest is not 
expected. For purposes of applying the ``well secured'' and ``in 
process of collection'' test for nonaccrual status listed above, the 
date on which a loan reaches nonaccrual status is determined by its 
contractual terms.
---------------------------------------------------------------------------

    \10\ Nonaccrual of interest also includes the amortization of 
deferred net loan fees or costs, or the accretion of discount. 
Nonaccrual of interest on loans past due 90 days or more is a 
longstanding agency policy and credit union practice.
    \11\ A purchased credit impaired loan asset need not be placed 
in nonaccrual status as long as the criteria for accrual of income 
under the interest method in GAAP is met. Also, the accrual of 
interest on workout loans is covered in a separate section of this 
IRPS later in the policy statement.
---------------------------------------------------------------------------

    While a loan is in nonaccrual status, some or all of the cash 
interest payments received may be treated as interest income on a 
cash basis as long as the remaining recorded investment in the loan 
(i.e., after charge-off of identified losses, if any) is deemed to 
be fully collectable. The reversal of previously accrued, but 
uncollected, interest applicable to any loan placed in nonaccrual 
status must be handled in accordance with GAAP.\12\ Where assets are 
collectable over an extended period of time and, because of the 
terms of the transactions or other conditions, there is no 
reasonable basis for estimating the degree of collectability--when 
such circumstances exist, and as long as they exist--consistent with 
GAAP the Cost Recovery Method of accounting must be used.\13\ Use of 
the Cash or Cost Recovery basis for these loans and the statement on 
reversing previous accrued interest is the practical implementation 
of relevant accounting principles.
---------------------------------------------------------------------------

    \12\ Acceptable accounting treatment includes a reversal of all 
previously accrued, but uncollected, interest applicable to loans 
placed in a nonaccrual status against appropriate income and balance 
sheet accounts. For example, one acceptable method of accounting for 
such uncollected interest on a loan placed in nonaccrual status is: 
(1) To reverse all of the unpaid interest by crediting the ``accrued 
interest receivable'' account on the balance sheet, (2) to reverse 
the uncollected interest that has been accrued during the calendar 
year-to-date by debiting the appropriate ``interest and fee income 
on loans'' account on the income statement, and (3) to reverse any 
uncollected interest that had been accrued during previous calendar 
years by debiting the ``allowance for loan and lease losses'' 
account on the balance sheet. The use of this method presumes that 
credit union management's additions to the allowance through charges 
to the ``provision for loan and lease losses'' on the income 
statement have been based on an evaluation of the collectability of 
the loan and lease portfolios and the ``accrued interest 
receivable'' account.
    \13\ When a purchased impaired loan or debt security that is 
accounted for in accordance with ASC Subtopic 310-30, ``Receivables-
Loans and Debt Securities Acquired with Deteriorated Credit 
Quality,'' has been placed on nonaccrual status, the cost recovery 
method should be used, when appropriate.
---------------------------------------------------------------------------

Restoration to Accrual Status for All Loans except Member Business 
Loan Workouts

    A nonaccrual loan may be restored to accrual status when:
     Its past due status is less than 90 days, GAAP does not 
require it to be maintained on the Cash or Cost Recovery basis, and 
the credit union is plausibly assured of repayment of the remaining 
contractual principal and interest within a reasonable period;
     When it otherwise becomes both well secured and in the 
process of collection; or
     The asset is a purchased impaired loan and it meets the 
criteria under GAAP for accrual of income under the interest method 
specified therein.
    In restoring all loans to accrual status, if any interest 
payments received while the loan was in nonaccrual status were 
applied to reduce the recorded investment in the loan the 
application of these payments to the loan's recorded investment must 
not be reversed (and interest income must not be credited). 
Likewise, accrued but uncollected interest reversed or charged-off 
at the point the loan was placed on nonaccrual status cannot be 
restored to accrual; it can only be recognized as income if 
collected in cash or cash equivalents from the member.

Restoration to Accrual Status on Member Business Loan Workouts \14\
---------------------------------------------------------------------------

    \14\ This policy is derived from the ``Interagency Policy 
Statement on Prudent Commercial Real Estate Loan Workouts'' NCUA and 
the other financial regulators issued on October 30, 2009.
---------------------------------------------------------------------------

    A formally restructured 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 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. A sustained period of 
repayment performance would be a minimum of six consecutive payments 
and would involve timely payments under the restructured loan's 
terms of principal and interest in cash or cash equivalents. In 
returning the member business workout loan to accrual status, 
sustained historical repayment performance for a reasonable time 
prior to the restructuring may be taken into account. Such a 
restructuring must improve the collectability of the loan in 
accordance with a reasonable repayment schedule and does not relieve 
the credit union from the responsibility to promptly charge off all 
identified losses.

[[Page 32003]]

    The graph below provides an example of a schedule of repayment 
performance to demonstrate a determination of six consecutive 
payments. If the original loan terms required a monthly payment of 
$1,500, and the credit union lowered the borrower's payment to 
$1,000 through formal member business loan restructure, then based 
on the first row of the graph, the ``sustained historical repayment 
performance for a reasonable time prior to the restructuring'' would 
encompass five of the pre-workout consecutive payments that were at 
least $1,000 (Months 1 through 5); so, in total, the six consecutive 
repayment burden would be met by the first month post workout (Month 
6). In the second row, only one of the pre-workout payments would 
count toward the six consecutive repayment requirement (Month 5), 
because it is the first month in which the borrower made a payment 
of at least $1,000, after failing to pay at least that amount. The 
loan, therefore, would remain on nonaccrual for at least five post-
workout consecutive payments (Months 6 through 10) provided the 
borrower continues to make payments consistent with the restructured 
terms.

----------------------------------------------------------------------------------------------------------------
                       Pre-workout                                              Post-workout
----------------------------------------------------------------------------------------------------------------
  Month 1     Month 2     Month 3     Month 4    Month 5    Month 6    Month 7    Month 8    Month 9    Month 10
----------------------------------------------------------------------------------------------------------------
    $1,500      $1,200      $1,200      $1,000     $1,000     $1,000     $1,000     $1,000     $1,000     $1,000
     1,500       1,200         900         875      1,000      1,000      1,000      1,000      1,000      1,000
----------------------------------------------------------------------------------------------------------------

    After a formal restructure of a member business loan, if the 
restructured loan has been returned to accrual status, the loan 
otherwise remains subject to the nonaccrual standards of this 
policy. If any interest payments received while the member business 
loan was in nonaccrual status were applied to reduce the recorded 
investment in the loan the application of these payments to the 
loan's recorded investment must not be reversed (and interest income 
must not be credited). Likewise, accrued but uncollected interest 
reversed or charged-off at the point the member business workout 
loan was placed on nonaccrual status cannot be restored to accrual; 
it can only be recognized as income if collected in cash or cash 
equivalents from the member.
    The following tables summarize nonaccrual and restoration to 
accrual requirements previously discussed:

                      Table 1--Nonaccrual Criteria
------------------------------------------------------------------------
                                                         Additional
           Action             Condition identified      consideration
------------------------------------------------------------------------
Nonaccrual on All Loans.....  90 days or more past  See Glossary
                               due unless loan is    descriptors for
                               both well secured     ``well secured''
                               and in the process    and ``in the
                               of collection; or     process of
                              If the loan must be    collection.''
                               maintained on the    Consult GAAP for
                               Cash or Cost          Cash or Cost
                               Recovery basis        Recovery basis
                               because there is a    income recognition
                               deterioration in      guidance. See also
                               the financial         Glossary
                               condition of the      Descriptors.
                               borrower, or for
                               which payment in
                               full of principal
                               or interest is not
                               expected.
Nonaccrual on Member          Continue on           See Table 2--Restore
 Business Loan Workouts.       nonaccrual at         to Accrual.
                               workout point and
                               until restore to
                               accrual criteria
                               are met.
------------------------------------------------------------------------


                       Table 2--Restore to Accrual
------------------------------------------------------------------------
                                                         Additional
           Action             Condition identified      consideration
------------------------------------------------------------------------
Restore to Accrual on All     When the loan is      See Glossary
 Loans except Member           past due less than    descriptors for
 Business Loan Workouts.       90 days, GAAP does    ``well secured''
                               not require it to     and ``in the
                               be maintained on      process of
                               the Cash or Cost      collection.''
                               Recovery basis, and  Interest payments
                               the credit union is   received while the
                               plausibly assured     loan was in
                               of repayment of the   nonaccrual status
                               remaining             and applied to
                               contractual           reduce the recorded
                               principal and         investment in the
                               interest within a     loan must not be
                               reasonable period.    reversed and income
                              When it otherwise      credited. Likewise,
                               becomes both ``well   accrued but
                               secured'' and ``in    uncollected
                               the process of        interest reversed
                               collection''; or.     or charged-off at
                              The asset is a         the point the loan
                               purchased impaired    was placed on
                               loan and it meets     nonaccrual status
                               the criteria under    cannot be restored
                               GAAP for accrual of   to accrual.
                               income under the
                               interest method.
Restore to Accrual on Member  Formal restructure    The evaluation must
 Business Loan Workouts.       with a current,       include
                               well documented       consideration of
                               credit evaluation     the borrower's
                               of the borrower's     sustained
                               financial condition   historical
                               and prospects for     repayment
                               repayment under the   performance for a
                               revised terms.        minimum of six
                                                     timely consecutive
                                                     payments comprised
                                                     of principal and
                                                     interest. In
                                                     returning the loan
                                                     to accrual status,
                                                     sustained
                                                     historical
                                                     repayment
                                                     performance for a
                                                     reasonable time
                                                     prior to the
                                                     restructuring may
                                                     be taken into
                                                     account.
                                                    Interest payments
                                                     received while the
                                                     member business
                                                     loan was in
                                                     nonaccrual status
                                                     and applied to
                                                     reduce the recorded
                                                     investment in the
                                                     loan must not be
                                                     reversed and income
                                                     credited. Likewise,
                                                     accrued but
                                                     uncollected
                                                     interest reversed
                                                     or charged-off at
                                                     the point the
                                                     member business
                                                     loan was placed on
                                                     nonaccrual status
                                                     cannot be restored
                                                     to accrual.
------------------------------------------------------------------------


[[Page 32004]]

Glossary \15\
---------------------------------------------------------------------------

    \15\ Terms defined in the Glossary will be italicized on their 
first use in the body of this guidance.
---------------------------------------------------------------------------

    ``Cash Basis'' method of income recognition is set forth in GAAP 
and means while a loan is in nonaccrual status, some or all of the 
cash interest payments received may be treated as interest income on 
a cash basis as long as the remaining recorded investment in the 
loan (i.e., after charge-off of identified losses, if any) is deemed 
to be fully collectible.\16\
---------------------------------------------------------------------------

    \16\ Acceptable accounting practices include: (1) Allocating 
contractual interest payments among interest income, reduction of 
the recorded investment in the asset, and recovery of prior charge-
offs. If this method is used, the amount of income that is 
recognized would be equal to that which would have been accrued on 
the loan's remaining recorded investment at the contractual rate; 
and, (2) accounting for the contractual interest in its entirety 
either as income, reduction of the recorded investment in the asset, 
or recovery of prior charge-offs, depending on the condition of the 
asset, consistent with its accounting policies for other financial 
reporting purposes.
---------------------------------------------------------------------------

    ``Charge-off'' means a direct reduction (credit) to the carrying 
amount of a loan carried at amortized cost resulting from 
uncollectability with a corresponding reduction (debit) of the ALLL. 
Recoveries of loans previously charged off should be recorded when 
received.
    ``Cost Recovery'' method of income recognition means equal 
amounts of revenue and expense are recognized as collections are 
made until all costs have been recovered, postponing any recognition 
of profit until that time.\17\
---------------------------------------------------------------------------

    \17\ FASB Accounting Standards Codification (ASC) 605-10-25-4, 
``Revenue Recognition, Cost Recovery.''
---------------------------------------------------------------------------

    ``Generally accepted accounting principles (GAAP)'' means 
official pronouncements of the FASB as memorialized in the FASB 
Accounting Standards Codification[supreg] as the source of 
authoritative principles and standards recognized to be applied in 
the preparation of financial statements by federally-insured credit 
unions in the United States with assets of $10 million or more.
    ``In the process of collection'' means collection of the loan is 
proceeding in due course either: (1) Through legal action, including 
judgment enforcement procedures, or (2) in appropriate 
circumstances, through collection efforts not involving legal action 
which are reasonably expected to result in repayment of the debt or 
in its restoration to a current status in the near future, i.e., 
generally within the next 90 days.
    ``Member Business Loan'' is defined consistent with Section 
723.1 of NCUA's Member Business Loan Rule, 12 CFR 723.1.
    ``New Loan'' means the terms of the revised loan are at least as 
favorable to the credit union (i.e., terms are market-based, and 
profit driven) as the terms for comparable loans to other customers 
with similar collection risks who are not refinancing or 
restructuring a loan with the credit union, and the revisions to the 
original debt are more than minor.
    ``Past Due'' means a loan is determined to be delinquent in 
relation to its contractual repayment terms including formal 
restructures, and must consider the time value of money. Credit 
unions may use the following method to recognize partial payments on 
``consumer credit,'' i.e., credit extended to individuals for 
household, family, and other personal expenditures, including credit 
cards, and loans to individuals secured by their personal residence, 
including home equity and home improvement loans. A payment 
equivalent to 90 percent or more of the contractual payment may be 
considered a full payment in computing past due status.
    ``Recorded Investment in a Loan'' means the loan balance 
adjusted for any unamortized premium or discount and unamortized 
loan fees or costs, less any amount previously charged off, plus 
recorded accrued interest.
    ``Troubled Debt Restructuring'' is as defined in GAAP and means 
a restructuring in which a credit union, for economic or legal 
reasons related to a member borrower's financial difficulties, 
grants a concession to the borrower that it would not otherwise 
consider.\18\ The restructuring of a loan may include, but is not 
necessarily limited to: (1) The transfer from the borrower to the 
credit union of real estate, receivables from third parties, other 
assets, or an equity interest in the borrower in full or partial 
satisfaction of the loan, (2) a modification of the loan terms, such 
as a reduction of the stated interest rate, principal, or accrued 
interest or an extension of the maturity date at a stated interest 
rate lower than the current market rate for new debt with similar 
risk, or (3) a combination of the above. A loan extended or renewed 
at a stated interest rate equal to the current market interest rate 
for new debt with similar risk is not to be reported as a 
restructured troubled loan.
---------------------------------------------------------------------------

    \18\ FASB ASC 310-40, ``Troubled Debt Restructuring by 
Creditors.''
---------------------------------------------------------------------------

    ``Well secured'' means the loan is collateralized by: (1) A 
perfected security interest in, or pledges of, real or personal 
property, including securities with an estimable value, less cost to 
sell, sufficient to recover the recorded investment in the loan, as 
well as a reasonable return on that amount, or (2) by the guarantee 
of a financially responsible party.
    ``Workout Loan'' means a loan to a borrower in financial 
difficulty that has been formally restructured so as to be 
reasonably assured of repayment (of principal and interest) and of 
performance according to its restructured terms. A workout loan 
typically involves a re-aging, extension, deferral, renewal, or 
rewrite of a loan.\19\ For purposes of this policy statement, 
workouts do not include loans made to market rates and terms such as 
refinances, borrower retention actions, or new loans.\20\
---------------------------------------------------------------------------

    \19\ ``Re-Age'' means returning a past due account to current 
status without collecting the total amount of principal, interest, 
and fees that are contractually due.
    ``Extension'' means extending monthly payments on a closed-end 
loan and rolling back the maturity by the number of months extended. 
The account is shown current upon granting the extension. If 
extension fees are assessed, they should be collected at the time of 
the extension and not added to the balance of the loan.
    ``Deferral'' means deferring a contractually due payment on a 
closed-end loan without affecting the other terms, including 
maturity, of the loan. The account is shown current upon granting 
the deferral.
    ``Renewal'' means underwriting a matured, closed-end loan 
generally at its outstanding principal amount and on similar terms.
    ``Rewrite'' means significantly changing the terms of an 
existing loan, including payment amounts, interest rates, 
amortization schedules, or its final maturity.
    \20\ There may be instances where a workout loan is not a TDR 
even though the borrower is experiencing financial hardship. For 
example, a workout loan would not be a TDR if the fair value of cash 
or other assets accepted by a credit union from a borrower in full 
satisfaction of its receivable is at least equal to the credit 
union's recorded investment in the loan, e.g., due to charge-offs.

[FR Doc. 2012-13214 Filed 5-30-12; 8:45 am]
BILLING CODE 7535-01-P