Loan Workouts

The examination process should be risk-focused and not a “one size fits all” review of the loan workout policy and program. Additionally, NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight. Examiners will scale the depth of review to the level of activity, complexity of the credit union and risk exposure. The depth of the review will depend on the unique fact pattern for each credit union, as well as, the level of risk posed by the program. When scoping the loan workout review, examiners will consider the following:

  1. Assess the credit union’s workout loan policy for compliance with part 741, Appendix B, Interpretive Ruling and Policy Statement on Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans, to determine if all required elements are met.
  2. Review credit union reports to determine the following:
    • Balance of workout activity including TDRs
    • Balance of TDRs compared to workout activity
    • Percentage of workout and TDR activity individually in relation to capital, earnings and volume of loan activity
  3. Evaluate the appropriateness of the credit union’s system capability and internal controls to track and monitor all workout activity given the size and complexity of the organization
  4. Interview management to understand the credit union’s controls over the loan workout program. Review a sample of file maintenance reports, loan approval logs, etc. to verify the processes.
  5. Review a sample of workout loans that have re-defaulted and loans subject to multiple workouts to assess the credit union’s compliance with NCUA regulation part 741, Requirements for Insurance
  6. Evaluate the adequacy of enhanced reporting to the board of directors

If initial analytical testing reveals limited exposure, then the examiner should limit the review to a high-level review of policy, controls, and reporting. If the exposure is significant enough to influence conclusions about the financial performance, net worth classification or health of the credit union’s loan portfolio, then the examiner should expand the review to perform a more comprehensive analysis including transaction testing.

Examiners should identify restructuring activity that pushes loan losses into future reporting periods. Credit unions may provide evidence that multiple restructurings improve collectability by performing a validation of completed multiple restructurings that substantiate the claim.

Questions to Consider

  • Did the credit union adjust their credit risk management policies and procedures to address the use of loan workout strategies, risk management practices, and new strategies to provide funds to borrowers impacted by the COVID-19 pandemic?
  • Did the credit union approve any loan modifications for borrowers financially impacted by COVID-19?, if yes:
    • Is the credit union maintaining a record that the loans were current prior to any relief being provided due to COVID-19?
    • Is the credit union retaining records of the volume of these loans? This data may be collected in the future for supervisory purposes
    • Is the credit union maintaining an appropriate ALLL or allowance for credit losses for these loans?
    • Does the credit union have the appropriate procedures and controls over loan workouts to ensure accuracy of reporting to the board of directors, and on the Call Report?
    • Is the credit union reporting these loans to the consumer reporting agencies as “current” or as the status reported before the accommodation unless the consumer becomes current?
    • Does the credit union have the appropriate procedures and controls to ensure this reporting standard applies throughout the workout period?
  • Are workout strategies improving loan collectability based on the amount and trending of non-accruing workouts and TDRs? If not, has management modified workout policies and practices accordingly?
  • Has management established strong servicing and collection strategies for workout loans? Typically, these strategies should be more stringent and include quicker escalation of collection efforts if the workout loan becomes delinquent.
  • Does the credit union conduct multiple restructurings on a single loan? If so, has the credit union performed a validation of completed multiple restructurings to substantiate improved collectability?
  • Does the credit union’s accounting for loan modifications comply with GAAP (unless accounting treatment falls under the CARES Act provisions)?
  • Is the credit union charging off uncollectible loans timely?
  • How great would an incorrect accounting/valuation to adequately fund the ALLL account need to be to result in a lower net worth category? How much could the credit union increase the PLL expense to correct inaccurate accounting/valuation before positive earnings become negative? Has management considered external economic variables that could result in a material impact on risk ratings and ALL funding (local real estate price trends, local unemployment rates, sponsor layoffs, etc.)?
  • Is the level of earnings sufficient to withstand proportionate incremental differences in ALLL valuations without causing a reader of the financial statements to reach incorrect conclusions about the health of the credit union?

Last updated on September 15, 2021