The Division of Credit Unions has published Interpretive Letter I-15-04 (Complying with GAAP in Relation to MBLs). This Interpretive Letter clarifies the requirements for Washington State-chartered credit unions when complying with generally accepted accounting principles (“GAAP”) in relation to member business loans (“MBL”) and reserving for their allowance for loan and lease losses (“ALLL”) account.
From the letter, State Credit Unions should incorporate key concepts and requirements in their ALLL account funding practices, included in the following:
- The ALLL supervisory guidance contained in the NCUA’s 2006 Accounting Bulletin, including the Questions and Answers on Accounting for Loan and Lease Losses,
- The 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, adopted by NCUA and all other federal banking regulators,
- NCUA’s 2002 IRPS 02-3 titled Allowance for Loan and Lease Losses Methodology and Documentation for Federally Insured Credit Unions, and
- The Accounting Standards Codification (“ASC”) 450 and ASC 310.
State Credit Unions should ensure that controls are in place to consistently determine the ALLL account balance at a level that is appropriate and determined in accordance with GAAP. An appropriate ALLL account balance will cover estimated credit losses on individually evaluated loans that are determined to be impaired as well as the estimated credit losses inherent in the remainder of the State Credit Union’s loan and lease portfolio.
State credit unions with a material amount of MBLs are expected to adopt and implement a commercial loan rating system. Materiality for this purpose is defined as those credit unions that have the lesser of either over five percent in aggregate MBLs to totals assets or over $25 million in total MBLs. The Division of Credit Unions (DCU) provided guidance on implementing a commercial loan rating system in Bulletin B-07-06, dated May 1, 2007.