Seeing a significant uptick in the number of loan modifications over the past few years, regulators and external auditors alike have been putting increased pressure on credit unions to become compliant with troubled debt restructuring rules. As a result, failing to properly identify and account for TDRs is a common finding in National Credit Union Administration (NCUA) examinations as well as external audits.

There are two primary reasons why credit unions are struggling: (1) TDRs are subjective, which means there are not always clear and concise answers. Examiners and auditors often have different opinions from management when determining if a modification is considered a TDR.  (2) Further, there is little regulatory or industry best practice guidelines on this issue, making it that much more challenging to properly identify, monitor and report troubled debt restructurings.

With this in mind, here are some key points to consider when determining what policies and procedures should be implemented:

  1. Identifying a TDR
  • Training: As stated previously the accounting rules for what constitutes a TDR are subjective; and not all loans that are modified will be TDRs. Properly training loan staff on how to identify a TDR is critical to ensuring proper accounting for a TDR.
  • Checklist: Consider using a checklist with the TDR criteria (GAAP) and common examples for loan administrative staff to use in making changes to loans in the system.
  • Segregation of duties: All loan modifications should go through a formal process where more than one or two people are responsible for the modification.
  • Review process: Implement a review process to go back and review all (or a sample of) modified loans for potential TDRs.
    • Use system reports from the loan application system to report all loans modified during a specific time period (one or two quarters at most).
    • Then define a material dollar amount and review all modified loans over that amount to determine if it should be considered a TDR.
    • Review the TDR checklist (referenced above) and the modification scenario and perform an independent assessment.
      • Remember, the general rule is if you didn’t document it, you didn’t do it. The burden of proof lies with the credit union, and regulators and auditors will require adequate reasoning for decisions in which a loan was modified and determined not to be a TDR.
      • It is imperative to have the reviewer and preparer sign and date when the review is performed.
      • The review should be done by a professional who is knowledgeable of TDR accounting and regulatory requirements (i.e. the Internal Auditor, Controller, or CFO).
  1. Monitoring and tracking
  • Use information reports from the loan application system if possible. Most systems now have fields for notating if a loan is a TDR.
  • If your loan systems do not have a way to track TDRs, then track them using some other form, such as Excel.
  • Keep and maintain documentation of the reports that support amounts used to disclose and report TDRs for financial and regulatory purposes.
  1. Accounting
  • Regularly train key accounting staff to on any accounting and regulatory changes.
  • Have a process in place to ensure TDRs are reviewed for impairment at the time of restructuring, and properly disclosed in financial statements and call reports. All TDRs inherently are impaired and will likely have a negative impact on the credit union, resulting in lower earnings and additional regulatory and financial reporting disclosure requirements.
  • Keep and maintain documentation of the reports that support amounts used to disclose and report TDRs for financial and regulatory purposes.
  1. Report to the board on a monthly or quarterly basis
  • Report the number, amount and any related impairment to the board of directors and/or supervisory committee on a monthly or quarterly basis.
  • Properly report and disclose TDRs in quarterly call report filings with NCUA, and on annual audited financial statements.
  • In terms of accounting for troubled debt restructuring, identification is key. A credit union can have all other proper controls in place but if a TDR isn’t properly identified, it can’t be properly monitored, accounted for, and reported