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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations
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policy must explicitly prohibit the authorization of additional advances to finance credit union fees and commissions.
The credit union may, however, make advances to cover third-party fees, such as force-placed insurance or property taxes. For loan workouts granted, a credit union must document the determination that the borrower is willing and able to repay the loan.
Modifications of loans that result in capitalization of unpaid interest are appropriate only when a borrower has the ability to repay the debt. At a minimum, if a FICUs loan modification policy permits capitalization of unpaid interest, the policy must require:
1. Compliance with all applicable federal and state consumer protection laws and regulations, including, but not limited to, the Equal Credit Opportunity Act, the Fair Housing Act, the Truth In Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, and the prohibitions against the use of unfair, deceptive or abusive acts or practices in the Consumer Financial Protection Act of 2010.
2. Documentation that reflects a borrowers ability to repay, a borrowers sources of repayment, and when appropriate, compliance with the FICUs valuation policies at the time the modification is approved.
3. Providing borrowers with written disclosures that are accurate, clear and conspicuous and that are consistent with Federal and state consumer protection laws.
4. Appropriate reporting of loan status for modified loans in accordance with applicable law and accounting practices. The FICU shall not report a modified loan as past due if the loan was current prior to modification and the borrower is complying with the terms of the modification.
5. Prudent policies and procedures to help borrowers resume affordable and sustainable repayments that are appropriately structured, while at the same time minimizing losses to the credit union. The prudent policies and procedures must consider i. Whether the loan modifications are welldesigned, consistently applied, and provide a favorable outcome for borrowers.
ii. The available options for borrowers to repay any missed payments at the end of their modifications to avoid delinquencies or other adverse consequences.
6. Appropriate safety and soundness safeguards to prevent the following:
i. Masking deteriorations in loan portfolio quality and understating charge-off levels; 5
guidance/evaluating-residential-real-estatemortgage-loan-modification-programs. Those best practices remain applicable to real estate loan modifications with the exception to the capitalization of credit union fees but could be adapted in part by the credit union in their written loan workout policy for other loans.
5 Refer to NCUA guidance on charge-offs set forth in LCU 03CU01, Loan Charge-off Guidance, dated January 2003 https www.ncua.gov/
regulation-supervision/letters-credit-unions-otherguidance/loan-charge-guidance. 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
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ii. Delaying loss recognition resulting in an understated allowance for loan and lease losses account or inaccurate loan valuations;
iii. Overstating net income and net worth regulatory capital levels; and iv. Circumventing internal controls.
The credit unions risk management framework must include thresholds, based on aggregate volume of loan workout activity, which trigger enhanced reporting to the board of directors. This reporting will enable the credit unions board of directors to evaluate the effectiveness of the credit unions loan workout program, understand any implications to the organizations financial condition, and make any compensating adjustments to the overall business strategy. This information will also be available to examiners upon request.
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, must be supported by the credit unions management information systems. Sound management information systems identify and document any loan that is re-aged, extended, deferred, renewed, or rewritten, including the frequency and extent of such action. Documentation normally shows that credit union 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 Credit unions will calculate the past due status of all loans 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
Loan Nonaccrual Policy Credit unions must recognize interest income appropriately. Credit unions must pooled loans to account for any loans with protracted charge-off timeframes for example, 12
months or more. See discussions on the latter point in the 2006 Interagency ALLL Policy Statement transmitted by Accounting Bulletin 061 December 2006 https www.ncua.gov/regulationsupervision/letters-credit-unions-other-guidance/
interagency-advisory-addressing-alll-key-conceptsand-requirements. Upon implementation of ASC
326Financial InstrumentsCredit Losses, credit unions will use the guidance in Interagency Policy Statement on Allowances for Credit Losses May 2020 https www.ncua.gov/files/press-releasesnews/policy-statement-allowances-creditlosses.pdf.
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 ASC Subtopic 31040 when determining if a restructuring of a debt constitutes a TDR.

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place loans in nonaccrual status when doubt exists as to full collection of principal and interest or the loan has been in default for a period of 90 days or more. Upon placing a loan in nonaccrual, a credit union must reverse or charge-off previously accrued but uncollected interest. A nonaccrual loan may be returned to accrual status when a credit union expects repayment of the remaining contractual principal and interest or it is well secured and in process of collection.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 commercial and member business loan workouts and is similar to the policies adopted by the federal banking agencies 8 as set forth in the FFIEC Call Report for banking institutions and its instructions.9
Nonaccrual Status Credit unions may not accrue interest 10 on any loan where 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 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.
While a loan is in nonaccrual status, a credit union may treat some or all of the cash payments received as interest income on a cash basis provided no doubt exists about the collectability of the remaining recorded investment in the loan. A credit union must handle the reversal of previously accrued, but uncollected, interest applicable to any loan placed in nonaccrual status in accordance with GAAP.12
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, Instructions and Supplemental Instructions, https
www.ffiec.gov/forms041.htm.
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 later section of this Appendix.
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 to reverse all of the unpaid interest by crediting the accrued interest receivable account on the balance sheet; 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 to reverse any uncollected interest that had been accrued
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