Troubled Debt Restructure (TDR) Update

Carl Roer, CLC Regulatory Comment Committee Member
July 2, 2010 | COMMENTS

A TDR has two characteristics—a member is experiencing financial difficulties, and the credit union grants a concession that it would not otherwise consider in order to protect the investment in the member loan. TDRs generally take the form of a modification of terms, such as: reduction in the interest rate, extension of maturity date, reduction of the face amount of debt, or reduction in the accrued interest on the debt.

Regarding the accounting for TDRs under GAAP, if a concession has been granted, the amount of that concession must be quantified. The concession is determined by performing a discounted cash flow analysis based on the original terms of the loan agreement. The amount of the concession granted is recorded as a specific reserve in the allowance for loan and lease losses (ALLL) balance, and is amortized (reduced) as payments are made.

In order to determine the amount of the impairment to be accounted for, credit unions should calculate the difference of the discounted present value of future cash flows, and the recorded investment in the loan. Discount using the original loan rate. A valuation allowance is established as a part of the ALLL—with a charge to loan loss provision for the amount of the impairment calculated. The impairment calculation can help in determining whether or not to modify a particular loan.

For some loans, such as perhaps extending the term on a delinquent auto with no change in rate, the present value calculation may not generate a meaningful result. An alternative method is such cases may be applying an historical loss ratio to these TDRs.

Communication is vital with TDRs—to management, board, regulators, and auditors. The authority levels on TDRs should be clearly established, and TDRs should be carefully monitored and tracked. Given the current economic environment, judgments of what is a TDR should be on the conservative side, i.e., err on the side of classifying the loan as a TDR. For Call Reporting purposes, TDRs may not return to full accrual status (i.e., they should be reported as delinquent) until a six-month consecutive payment requirement is met.