The NCUA recognizes that, during challenging economic times or when a borrower encounters temporary repayment challenges, credit unions will need to work constructively with member-borrowers to implement prudent member business loan workouts that are in the best interest of both the credit union and the member-borrower.
Loan workouts can take many forms, including a renewal or extension of loan terms, extension of additional credit, or a restructuring (with or without concessions). A renewal or restructuring should improve a credit union’s prospects for repayment of principal and interest and be consistent with sound banking, supervisory, and accounting practices.
In October 2009, the FFIEC released a policy statement supporting prudent CRE loan workouts.1 The policy statement provides beneficial guidance for examiners and for credit unions that are working with member business loan borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The NCUA subsequently issued the interagency guidance in a letter to credit unions in June 2010.
NCUA’s Letter to Credit Unions 10-CU-07 set forth the agency’s position and expectations regarding credit unions’ risk management practices for member business loan workout programs and individual member business loan workout arrangements. While the guidance is specific to commercial real estate loans, the principles set forth and examples provided are generally applicable for most loan workout processes.
Specifically, Letter to Credit Unions 10-CU-07 holds that:
- Risk management practices for renewing and restructuring member business loans should be appropriate for the complexity and nature of the lending activity and consistent with safe and sound lending practices and regulatory requirements;
- Prudent loan workout arrangements should improve the prospects for repayment of principal and interest, and should be supported by a comprehensive analysis of the member-borrower’s willingness and ability to repay the loan, an evaluation of support provided by guarantors, and a current assessment of the value of the underlying collateral;
- Workout arrangements should be reported in accordance with Call Report instructions;
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Loan loss estimates should comply with GAAP
The policy statement includes examples of CRE loan workouts. The examples, provided for illustrative purposes only, reflect examiners’ analytical processes for evaluating accounting and reporting treatment for restructured loans. The policy statement also includes sources of relevant supervisory and accounting guidance.
Last updated November 25, 2016