Financial Institutions Executive Briefing


Financial Institutions Executive Briefing – Oct. 15, 2014

The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe Horwath LLP. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.

From the Federal Financial Institution Regulators

Guidance on Modifications of Troubled Debt Restructurings Provided

An open question has been how to account for a modification of a troubled debt restructuring (TDR): whether the modified loan continues to be measured and disclosed as a TDR or whether situations exist in which the loan is no longer deemed to be a TDR. In the Federal Financial Institutions Examination Council (FFIEC) third-quarter supplemental call report instructions and in National Credit Union Administration (NCUA) Accounting Bulletin No. 14-1, the agencies note that they will not object to an institution no longer treating a subsequent restructuring as TDR under these circumstances:

  1. At the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring.
  2. Under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower. The agencies consider any prior principal forgiveness on a cumulative basis to be a concession.
  3. The subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for comparable new debt.

Upon meeting these criteria, the following will occur:

  1. The loan no longer needs to be measured as a TDR in accordance with Accounting Standards Codification (ASC) 310-10, “Receivables – Overall” (formerly Financial Accounting Standards Board [FASB] Statement 114) but rather measured in accordance with ASC 450-20, “Contingencies – Loss Contingencies” (formerly FASB Statement 5).
  2. The loan no longer needs to be disclosed as a TDR in the call report.

For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10. However, consistent with ASC 310-40-50-2, “Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings,” the loan would not be required to be reported in the call report in calendar years following the restructuring if the subsequent restructuring meets both of these criteria:

  1. Has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate
  2. Is performing in compliance with its modified terms after the subsequent restructuring

Even though the loan need no longer be measured for impairment as a TDR or disclosed as a TDR, the recorded investment in the loan should not change at the time of the subsequent restructuring (unless cash is advanced or received). The agencies also remind that no recoveries should be recognized until collections on amounts previously charged off have been received. In addition, any interest payments previously applied to the recorded investment should not be reversed at the subsequent restructuring.

Institutions may choose to apply this guidance prospectively to subsequently restructured loans that meet the conditions for removing the TDR designation. Institutions also may choose to apply this guidance to loans outstanding as of Sept. 30, 2014, for which there has been a previous subsequent restructuring that met the conditions already discussed at the time of the subsequent restructuring. However, prior call reports should not be amended.

Definition of “Public” and Use of the PCC Alternatives Addressed

With the issuance of Accounting Standards Update (ASU) 2013-12, “Definition of a Public Business Entity,” the FASB broadened the definition of “public” for financial reporting purposes, and more banks and savings institutions are and will be subject to early effective dates, more disclosure, and possibly differences in recognition and measurement. The agencies address the FASB’s definition of public business entity (PBE) in the third-quarter supplemental call report instructions, including a discussion of why institutions with greater than $500 million in assets might be considered public for financial reporting purposes.

In addition to the typical differences in effective dates and disclosures between PBEs and non-PBEs, any entity that meets the definition of a PBE is not eligible to use alternatives provided by the Private Company Council (PCC).

Given the PCC alternatives do create differences in U.S. generally accepted accounting principles (GAAP), an open question had been whether the agencies would accept the use of the alternatives for regulatory reporting purposes. Until the agencies could evaluate the legal and policy issues of permitting the use of the PCC alternatives and whether their use meets their safety and soundness objectives, the banking agencies recommended, in the first-quarter supplemental call report instructions, that institutions not elect the alternatives. In the third-quarter instructions, the agencies note their conclusion that a bank or savings association that is a private company, as defined in U.S. GAAP (as already discussed), is permitted to use private company accounting alternatives issued by the FASB for call report purposes, except if the agencies determine that a particular alternative is inconsistent with supervisory objectives. The agencies would provide appropriate notice if they were to disallow any accounting alternative under the statutory process.

Aside from concluding that the PCC alternatives can be elected for statutory reporting purposes, subject to individual review for consistency with the agencies’ supervisory objectives, the agencies announced that a bank or savings association that meets the private company definition (i.e., does not meet the definition of a PBE) is permitted, but not required, to adopt FASB ASU 2014-02, “Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill,” for call report purposes. The instructions also summarize the ASU and provide guidance on early adoption.

The NCUA also expects to permit the use of the PCC alternatives and plans to issue similar guidance in the near term.

FFIEC Cybersecurity Resources Discussed

The FFIEC recently discussed initiatives being taken by its members to raise the awareness of financial institutions and their service providers about cybersecurity. These efforts are directed toward identifying, assessing, and mitigating cybersecurity threats. One such initiative, announced in June 2013, was the creation of the Cybersecurity and Critical Infrastructure Working Group to promote coordination among the federal and state banking regulatory agencies and private sector groups on critical infrastructure and cybersecurity issues. A Web page dedicated to cybersecurity awareness was launched by the FFIEC in June 2014. The Web page includes links to FFIEC statements and resources along with links to other resources addressing cybersecurity.

Revised Risk-Based Capital Rule to Be Re-exposed by NCUA

On Sept. 29, 2014, NCUA board Chairman Debbie Matz announced her intention to request that a revised proposed risk-based capital rule be issued with a new comment period. Changes, including some affecting the rule’s structure, are being considered to the previously proposed risk-based capital rule published in February 2014. The revised proposal will include, among other changes, a longer implementation period and revised risk weights for mortgages, investments, member business loans, credit union service organizations, and corporate credit unions. Matz indicated that another comment period is appropriate because of the “significant structural changes” to the rule.

The NCUA board could issue an amended proposal before the end of 2014.

September Issue of NCUA Report Published

The NCUA posted the September 2014 issue of “The NCUA Report” on its website Sept. 17, 2014. This issue includes articles discussing the dangers of indirect auto lending, the importance of internal controls as a means of reducing risk, and the process of developing a strong business continuity plan. An article from the Office of Examination and Insurance discusses second-quarter 2014 call report data indicating that loans increased at the highest year-over-year growth rate since the first quarter of 2006.

More Stringent Standards to Be Proposed for Biggest Banks

Daniel K. Tarullo, Federal Reserve (Fed) governor and FFIEC vice chairman, testifying before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, said the Fed, along with global regulators, is working to “develop a proposal that would require the largest, most complex global banking firms to maintain a minimum amount of loss absorbency capacity beyond the levels mandated in the Basel III capital requirements.” Addressing significant regulatory priorities, Tarullo, in his Sept. 9, 2014, testimony, discussed near- to medium-term measures the Fed is contemplating taking to enhance the resiliency and resolvability of U.S.-based global systemically important banks (GSIBs). Those measures may include GSIB risk-based capital surcharges. Tarullo indicated that the surcharge level for U.S. GSIBs will be higher than the levels required by the Basel Committee on Banking Supervision and that the surcharge formula directly will take into account each GSIB’s reliance on short-term wholesale funding.

Tarullo also addressed the Fed’s efforts to minimize the regulatory burden on community banks. He told the committee, “The Federal Reserve is supportive of considering areas where the exclusion of community banks from statutory provisions that are less relevant to community bank practice may be appropriate.” Examples of areas to be considered include whether community banks should be excluded from the scope of the Volcker rule and from the incentive compensation requirements of Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

From the Federal Housing Finance Agency (FHFA)

Changes in FHLB Membership Eligibility Proposed

The Federal Housing Finance Agency on Sept. 2 , 2014, proposed a rule that would revise the requirements to apply for and maintain membership in a Federal Home Loan Bank (FHLB). The proposed rule is intended to establish that FHLB members maintain a commitment to housing finance and that only eligible entities can gain access to FHLB advances and other membership benefits.

These are some aspects of the proposed rule:

  • A quantitative test would be established to require all members to hold 1 percent of their assets in home mortgage loans and maintain that minimum level on an ongoing basis. The list of items qualifying as home mortgage loans for the 1 percent test would be expanded to include all types of mortgage-backed securities backed by qualifying whole loans and securities.
  • Certain members that are subject to the 10 percent residential mortgage loans requirement would have to adhere to this requirement on an ongoing basis rather than just at the initial date of application for membership.
  • The definition of “insurance company” would be refined to exclude captive insurance companies from membership. Membership of existing captive insurers would be phased out over five years with defined limits on advances.

Comments on the proposed rule are due Nov. 12, 2014.

The CFPB on Sept. 8, 2014, released “TILA-RESPA Integrated Disclosure Rule: Small Entity Compliance Guide.” The updated compliance guide reflects the combining of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) disclosures. The TILA-RESPA Integrated Disclosure Rule, which becomes effective Aug. 1, 2015, merges the TILA and RESPA disclosures into two forms:

From the Consumer Financial Protection Bureau (CFPB)

TILA-RESPA Small-Entity Compliance Guide Updated

On Sept. 15, 2014, the FASB published an exposure draft, “Technical Corrections and Improvements.” The proposed amendments would affect a wide variety of topics in the FASB ASC but are not intended to change U.S. GAAP fundamentally. The proposed amendments generally involve one of the following types:

  • “Loan Estimate” – This form combines the “Good Faith Estimate” and initial “Truth in Lending” disclosures. The form must be provided to consumers no later than the third business day after they submit a loan application.
  • “Closing Disclosure” – The “HUD-1” and final “Truth in Lending” disclosures have been combined into this new form that must be provided to consumers at least three business days before the loan’s consummation.

The CFPB also issued a new sample disclosure timeline illustrating what actions would be expected of a creditor at different stages of the origination process and issued a guide to the two new forms, providing detailed illustrated instructions for completing the forms.

From the Financial Accounting Standards Board (FASB)

Technical Corrections Proposals Published

  • Amendments related to differences between original guidance and the codification. These amendments would principally carry forward pre-codification guidance (FASB statements, Emerging Issues Task Force issues, and similar guidance) into the ASC
  • Clarification of guidance and corrections to references
  • Simplifications that would streamline or simplify the ASC
  • Minor improvements to guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities

Comments on the proposed amendments are due Dec. 15, 2014.

From the Securities and Exchange Commission (SEC)

Updated C&DIs Published

The staff in the SEC’s Division of Corporation Finance issued an update to its Compliance and Disclosure Interpretations (C&DIs) on Oct. 2, 2014. The update includes a revision to question 141.05. The revision provides guidance on whether an issuer can use its own website or social media presence to offer securities in a manner consistent with Rule 147 permitting companies to raise monies without registering shares under the Securities Act.

Creation of New Office Within the Division of Economic and Risk Analysis Announced

On Sept. 11, 2014, the SEC announced the creation of a new office with the Division of Economic and Risk Analysis. The new Office of Risk Assessment will coordinate efforts to create data-driven risk assessment tools. The predictive analytics the office is expected to provide will support supervisory, surveillance, and investigative programs involving corporate issuers, broker-dealers, investment advisers, exchanges, and trading platforms.

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