On September 30, 2014, the NCUA released Accounting Bulletin No. 14-1 regarding the revised reporting standards for modified loans classified as Troubled Debt Restructurings (TDRs).
The bulletin was released in response to an interagency regulatory reporting policy on Accounting for a Subsequent Restructuring of a Troubled Debt Restructuring.
The new guidance provides an exception to the “Once a TDR, always a TDR” rule prescribed under ASC Subtopic 310-30, Receivables (formerly FAS 114). Under the revised bulletin, a subsequent restructuring of a loan can trigger a removal from TDR status if it meets all of the following criteria:
- At the time of subsequent restructuring, the borrower is no longer experiencing financial difficulties; and
- The terms of the subsequent restructuring is similar to market interest rates for new debt with similar credit risk characteristics; and
- The terms offered are no less favorable to the institution than those it would offer for such new debt, i.e., no concession should be granted.
The important point here is that the TDR loan must be restructured, and it has to be restructured with similar terms that the institution is offering on its newly originated loans with similar characteristics. The loan cannot be removed from TDR status simply because the modification period has expired and the loan is performing according to its original terms. At the time of subsequent restructuring, a credit evaluation should be performed and must be well-documented. If the subsequent restructuring meets all three requirements outlined above, the credit union no longer needs to assign a specific lifetime loss reserve for the loan. The loan can be moved out of TDR status and into the regular pool of loans for purposes of calculating the allowance for loan losses.
When evaluating whether a concession has been granted, credit unions need to consider any principal forgiveness as a continuing concession. In this case, loans with prior principal forgiveness will remain in TDR status even if they satisfy the first two criteria as specified above.
The NCUA has allowed prospective application of this guidance as of September 30, 2014. The guidance may also be prospectively applied for any previously restructured loans meeting these guidelines.