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.123 Regulatory guidance for financial institutions
Publication date: 17 Dec 2019
us Impairment (pre-ASC 326) ARM 3560.123
Guidance for the regulatory reporting and capital treatment of loans and leases for banking institutions are mainly reflected in the instructions to the:
- | Consolidated Reports of Condition and Income (Call Report) for banks; |
- | Consolidated Financial Statements for bank holding companies (FR-Y9C); and |
- | 5300 Call Report (5300) for federally insured credit unions. |
In addition, the OCC publishes and periodically updates its Bank Accounting Advisory Series (BAAS), most recently updated as of August 2018.
The banking and savings association regulators and the NCUA for credit unions with $10 million or more total assets have long indicated the intention that regulatory reporting would conform with GAAP principles and guidance, while recognizing a need for more granular reporting for safety and soundness and compliance purposes. The BAAS and the instructions to the respective regulatory reports together provide helpful context for industry practice which, historically, have been referenced to supplement GAAP guidance on a range of related topics such as classification, income recognition, and loss estimation.
These regulators have collaborated through a joint working group to develop a shared understanding of the procedures and processes, including “sound practices” used generally by banking organizations, to determine the allowance for loan and lease losses (ALLL). Having reached consensus on certain aspects related to the design and implementation of ALLL methodologies and, in particular, supporting documentation practices, the SEC and the banking agencies issued the following parallel guidance:
- | SAB 102 (SAB Topic 6.L), Selected Loan Loss Allowance Methodology and Documentation Issues, which was codified in ASC 310; and |
- | FFIEC’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions. |
Additional banking agencies’ guidance regarding ALLL estimation includes the following interagency policies and supplementary guidance documents:
- | Interagency Policy Statement on the Allowance for Loan and Lease Losses (ALLL Policy) and supplemental Frequently Asked Questions (FAQs), issued in December 2006, revises and replaces the 1993 Policy Statement on the ALLL. Credit Unions are also subject to the revised ALLL Policy. |
- | Uniform Retail Credit Classification and Account Management Policy ("Uniform Credit Policy") issued on June 12, 2000. |
- | Interagency Guidance on Subprime Lending (January 31, 2001), the Expanded Guidance for Subprime Lending, and SR 07-12 Statement on Subprime Mortgage Lending. On June 29, 2007, the agencies issued the Statement on Subprime Mortgage Lending (Subprime Statement) to expand the Interagency Guidance on Subprime Lending and to address emerging issues and questions relating to certain subprime mortgage lending practices. Based on comments received about subprime lending practices, the agencies were concerned that borrowers did not fully understand the risk and consequences of obtaining products that can cause payment shock such as adjustable-rate mortgage products. The Statement reiterates many of the principles addressed in existing guidance relating to prudent risk management practices and consumer protection laws. |
- | Interagency Guidance on Certain Loans Held for Sale (HFS Policy), issued on March 26, 2001. |
- | Interagency Policy Statement on Account Management and Loss Allowance Guidance for Credit Card Lending, issued on January 8, 2003. |
- | Interagency Update on Accounting for Loan and Lease Losses, issued on March 1, 2004. |
- | Overdraft Protection Programs Interagency Guidance, issued on February 18, 2005. |
- | Home Equity Lending Credit Risk Management, issued May 24, 2005; addendum issued September 29, 2006. |
- | Interagency Policy Classification of Commercial Credit Exposures, issued on March 28, 2005. |
- | Interagency Guidance on Nontraditional Mortgage Product Risks, issued September 26, 2006. |
- | Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, issued on December 13, 2006. |
- | Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages, issued on September 5, 2007. |
- | Statement to Financial Institutions Servicing Residential Mortgages on Reporting Loss Mitigation of Subprime Mortgages, issued on March 3, 2008. |
- | Prudent Commercial Real Estate Loan Workouts, issued on October 30, 2009. |
- | Troubled Debt Restructuring Interagency Supervisory Guidance, issued on October 24, 2013. |
Following issuance of ASC 310-20, the banking agencies announced they would retain their existing guidance governing the recognition of interest income. This guidance is mainly reflected in the respective regulatory reporting instructions (e.g., Call Report, Y9C, 5300) and supplementary guidance including the BAAS. As noted above, these documents, which are updated periodically, provide guidance on a range of related topics, including accrual status. In particular, these guidelines and reporting instructions generally require financial institutions to suspend accrual of interest income when principal or interest is past due 90 days or more and the loan is not well secured and in process of collection, or when, in the opinion of management, principal or interest is not likely to be paid in accordance with its terms. When a loan is placed on nonaccrual status, previously accrued but unpaid interest income should be reversed. Thrift guidance, which is consistent with those for banks and bank holding companies, addresses nonaccrual status under the definition of nonperforming assets.
Certain of this regulatory guidance also provides regulated organizations with a basis to recognize charge-offs and recoveries for certain types of loans and leases. For example,
- | The Uniform Credit Policy covers the supervisory policy approved by the Agencies for uniform classification and treatment of retail credit loans, including residential and open-ended loans, by banks and savings associations, and includes the banking agencies’ guidelines regarding the recognition of charge-offs for consumer loans. |
- | The HFS Policy addresses the accounting and reporting treatment for certain loans (including those that are past due or nonaccrual) that are sold directly from the loan portfolio or transferred to a held for sale account, and is applicable when (1) an institution decides to sell loans that were not originated or otherwise acquired with the intent to sell, and (2) the fair value of those loans has declined for any reason other than a change in the general market level of interest or foreign exchange rates. The HFS Policy: highlights identification, transfer and recording at fair value of a loans not originated or initially acquired with the intent to sell; directs that any reduction in the loan's value at the date of transfer should be reflected as a write-down of the recorded investment resulting in a new cost basis, with a corresponding reduction in the ALLL; emphasizes that any further declines in fair value would not be charged to the ALLL; and recognizes that the best evidence of fair value is a quoted market price and sets forth items to be considered if such is not available when estimating a loan’s fair value. |
- | The instructions to the Call Report, Y9C, 5300, and the BAAS variously address a range of topics such as the inter-relationship of charge-offs and fee income reversal on retail credit, recognition of charge-offs and recoveries, allocated transfer risk reserves, the application of push down accounting of recoveries, and troubled debt restructurings, among other related topics. |
The firm's US Financial Services Regulatory Practice can assist with questions and additional guidance on regulatory reporting.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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