In the many letters to credit unions, alerts, and interagency guidance, one of the key takeaways is that loan modifications and workouts should be well documented as to the reasoning behind the accommodations.
Any new or changed policies should address the use of loan workout strategies and the practices and strategies in place to provide funds to borrowers impacted by COVID-19.
Examiners are focusing on any adjustments to address borrowers facing financial hardship as a result of the pandemic.
Accuracy is crucial when following applicable accounting and regulatory reporting requirements for all loan modifications, regardless of whether the modification is an initial modification or any additional modifications after the initial accommodation period.
Call Report instructions, interagency statements on troubled debt restructurings, section 4013 of the CARES Act, and ALLL account requirements in accordance with FASB accounting standards all provide insight and clarity as to how to report the information.
In addition to assessing loan workout programs, examiners will review credit unions for potential safety and soundness concerns.
NCUA has indicated in guidance that credit unions experiencing increases in delinquencies and loan losses could use qualitative and environmental factors (Q&E) to adjust historical loss factors.
Keep in mind, though, that credit unions must document the adjustments with supporting evidence and explain why they used the information (i.e., the local unemployment rate) in the loss measurements. Allowances for loan and lease loss calculations are specific to each institution, so credit unions should consult their CPA regarding ALLL funding.
Don’t circumvent internal controls. The credit union’s risk management framework (and its monitoring and reporting framework) enable the board of directors to evaluate the effectiveness of the program, any implications the framework has on the credit union’s financial condition, and whether the credit union adjusted its business strategy.
Agency letters to credit unions, alerts, and interagency guidance issued since the beginning of the pandemic highlight the need to document and substantiate the reasons behind loan accommodations and workouts.
Examiners will assess the various workout programs credit unions put in place (such as modifications, refinances, due date adjustments) and whether these programs ultimately improve the collectability of the debt.
Communications with the member borrower and corresponding legal documentation must be clear, accurate, and timely, and in accordance with contractual terms, policy guidelines, federal and state laws, and regulatory requirements.
Examiners will assess safety and soundness, and whether the credit union has put in place risk management strategies that consider this unprecedented time.
Examiners will be interested in how credit unions have handled the COVID-19 pandemic, the type of processes and programs they’ve put in place, and whether those processes and programs have been able to assist, evolve, mitigate, and manage the risks in this challenging time.