WASHINGTON (12/12/08)--The current financial market is forcing credit unions to consider the effects of carrying foreclosed and repossessed assets (FRA) on their statements of financial condition and their federal regulator has issued guidance on the issue. The National Credit Union Administration (NCUA) posted to its website a letter from the chairman (08-CU-06) titled “Working with Residential Mortgage Borrowers,” which instructs credit unions on some of the issues they face when holding FRA. First and foremost, the NCUA letter urges credit unions to work with borrowers when possible because prudent workout arrangements can be in the long-term best interest of both the credit union and the member. “However, when foreclosures are unavoidable, you must consider all risks associated with holding FRA,” writes NCUA Chairman Michael Fryzel. The letter states FRA should only be held temporarily and not permanently as an income-producing asset. The assets should be actively marketed for sale “as evidenced by the fact the credit union has committed to a plan of sale, is seeking a buyer, and expects to collect on the sale within 12 months.” A letter footnote reminds that Federal Credit Union Act authorizes a federal credit union to hold and dispose of real property only necessary or incidental to its operations and that most state regulators have similar requirements. The NCUA advises that a credit union managing FRA should establish policies and procedures that establish an acceptable and manageable level of risk to protect the safety and soundness of the credit union. The guidance states that policies and procedures should consider and address the following applicable risks:
* Liquidity--to determine the level of FRA the credit union can hold and manage before negative implications place undue stress on its liquidity position; * Transaction--to ensure the FRA is appropriately reported on the statement of financial condition; * Compliance--considering all applicable consumer regulations and state laws; * Strategic--understanding implications a chosen strategy places on a credit union’s current and future earnings; and * Reputation--a credit union should determine which properties will be sold immediately and which will be held for a short period of time.
“Examiners will evaluate these policies and procedures as needed to ensure the credit union can safely manage all implications associated with FRA on the statement of financial condition,” Fryzel writes. Use the resource link below to read the complete NCUA guidance letter on FRAs.