CUNA Comment Letter

CUNA Opposes NCUA's Proposal Governing IRPS on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation

January 24, 2002

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314

RE: Proposed IRPS on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation

Dear Ms. Baker:

The Credit Union National Association appreciates this opportunity to comment on the National Credit Union Administration Board’s NCUA’s Proposed Interpretive Ruling and Policy Statement (IRPS) on ALLL Methodologies and Documentation for Federally Insured Credit Unions. CUNA represents more than 90% of our nation’s over 10,300 state and federal credit unions.

The proposed guidance tracks the Federal Financial Institutions Examination Council’s Final Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions as well as similar guidance promulgated by the Securities and Exchange Commission. While we appreciate NCUA’s efforts to ensure credit unions utilize ALLL methodologies that are not inconsistent with the other federal financial institutions, comments we have received indicate that some of the provisions of the proposed guidance would needlessly burden credit unions.

The proposed IRPS clarifies that for financial reporting purposes, including regulatory reporting, the provision for loan and lease losses and the ALLL must be determined in accordance with generally accepted accounting principles (GAAP). The vast majority of credit union loans and leases are in institutions that already comply with GAAP.

We are not aware of indications that credit union ALLLs are systemically deficient. The record shows that credit unions have managed ALLLs in a prudent manner in a variety of financial and economic environments and that credit unions are adequately reserving for loan and lease losses. Because there does not appear to be deficiencies in the current ALLL methodology and reporting, we question whether such an extensive policy change is warranted at this time.

The documentation requirements for credit unions would expand under this proposed guidance. They would impose an excessive burden on credit unions by requiring additional time and expense to prepare the appropriate paperwork. In particular, it is difficult to establish policies and procedures and maintain adequate documentation of methodologies and estimates on loans with unique characteristics, such as member business loans. This proposed guidance could result in credit unions making fewer nontraditional loans in order to avoid the extra documentation procedures. In the absence of documented systemic problems, CUNA questions the necessity of proceeding with the proposal.

The proposed guidance would add responsibilities on credit union boards of directors at a time when attracting qualified volunteers seems to be increasingly difficult for many credit unions. According to the first section of the proposed IRPS, “[t]he amounts to be reported each period for the provision for loan and lease losses and the ALLL should be reviewed and approved by the board of directors.-- We question whether the boards of directors should be required to approve every increase to the ALLL. Such detailed financial report preparation is properly the responsibility of the supervisory committee; boards should be required to have oversight over the methodology used by the supervisory committee, audit committee or independent outside auditors, periodically have the methodology validated, and ensure that the methodology is revised when appropriate.

The section titled “Consolidating the Loss Estimates-- states, “To verify the ALLL balances are presented fairly in accordance with GAAP and are auditable, management should prepare a document that summarizes the amount to be reported in the financial statements for the ALLL. The board of directors should review and approve this summary.-- Management is properly responsible for the preparation of a document that summarizes the amounts for the ALLL reported in financial statements. We question whether it is a prudent use of the board of directors to require them to approve those amounts. In addition, the proposed guidance charges the Board of Directors with direct involvement in ALLL monthly provision and methodology. In our view, boards of directors should simply be informed of the monthly provision for ALLL and approve any charge-offs made by management. Credit union boards of directors are fully occupied with decisions regarding the future direction of the credit union and would be detracted from that responsibility by being required to sift through supporting loan loss documentation paperwork.

We wholeheartedly support the proposed guidance’s recognition that credit unions should adopt practices that are appropriate to their size and complexity and believe this should be a guiding principle in any guidance on ALLL. We would like to work with the agency, under the auspices of our Examination and Supervision Subcommittee, to develop a simpler rule to accomplish that goal without introducing new burdens on credit union management and board members.

Should NCUA decide to issue the IRPS in final form, we recommend that credit union supervisory committees and audit committees have an adequate period of time, such as 6 months, to review the documentation policies and procedures before they must comply with the final guidance to make sure they are consistent with the guidance. Also, the American Institute of Certified Public Accountants (AICPA) is expected to issue a proposed rule on loan loss reserves in the next several months. We recommend that NCUA wait to make a determination on this proposed guidance, which may require changes in the Application of GAAP section of the IRPS, until the AICPA issues its final rule.

In summary, GAAP with respect to ALLL is flexible and does not prescribe a particular methodology or documentation procedure. NCUA’s guidance should focus on whether management has properly assessed its ALLL instead of the particular methodology utilized.

If you have any questions regarding this letter, please contact CUNA Associate General Counsel Mary Mitchell Dunn at (202) 508-6736 or Senior Regulatory Counsel Catherine Orr at (202) 508-6743.


Mary Mitchell Dunn
Associate General Counsel

Catherine A. Orr
Senior Regulatory Counsel