Section 190.70  Loan Loss Accounting Procedures

a)         For the purpose of absorbing and reporting loan losses, all credit unions must establish, at a minimum, the following accounts in the general ledger:

1)         Allowance for Loan Losses – A portion of the statutory Regular Reserve segregated and reported as a direct reduction of loans.

2)         Provision for Loan Losses – An expense account, immediately preceding dividend expense, used to reflect the cost of losses on loans.  At a minimum, adjustments to the allowance for loan losses shall be made prior to the distribution or posting of any dividend to the accounts of members so that the valuation allowance for loan losses established fairly presents the value of loans and probable losses for all categories of loans.  The allowance for loan losses must encompass:

A)        specifically identified substandard doubtful or loss loans;

B)        pools of classified loans;

C)        pools of unclassified loans (consumer, credit card, mortgage, business, etc.); and

D)        a general portion, as needed, for all other loans and credit instruments.

b)         The Allowance for Loan Losses (ALL) is initially established by a one-time transfer from the Regular Reserve (RR). The portion of the ALL adjustment that is attributable to the initial adoption of the Individual Classification method may be made through a one time entry to the undivided earnings account and shall only be permitted as a result of a statutory examination.  Any subsequent replenishment of the ALL must be expensed using the Provision for Loan Losses (PLL) Account.  Except as provided herein no subsequent transfer from the Regular Reserve is permitted after the initial establishment of the Allowance for Loan Losses.  The ALL shall be maintained at a level equivalent to an amount computed using both the past five calendar years average loss ratio and an individual classification of probable losses for all consumer and real estate loans.  Pursuant to subsection (a)(2)(C), if a pool consists of a large group of smaller balance homogeneous loans, a credit union may utilize an estimated loss percentage on the pool to be determined by collectively evaluating the pool of loans for impairment, as permitted by generally accepted accounting principles (GAAP) (Miller, Comprehensive GAAP Guide, Harcourt, Brace & Co., 6277 Sea Harbor Dr., Orlando FL 32877, 1997 (no subsequent dates or editions)). The portion of the ALL attributable to the pool of loans may be determined by applying the estimated loss percentage to the total outstanding balance of the loans comprising the pool instead of individually classifying delinquent loans in the pool.  An individual loan within a smaller balance homogeneous loan pool shall not exceed a credit union's unsecured lending limits set forth in Section 190.160.  Separate ALL's shall be established for loans secured by real estate and for those loans not so secured.

c)         Delinquency is defined as the failure to make a required payment on or before the contractual due date.  Loans delinquent more than 60 days, bankruptcy and loans that exhibit deficiencies that impair their full collectibility shall be classified as either substandard, doubtful or loss.

1)         Substandard Loans – A substandard loan is one that is inadequately protected by the current sound worth and paying capacity of the obligee or of the collateral pledged.  Loans classified as substandard have a well defined weakness or weaknesses that jeopardized the liquidation of the debt.  They are characterized by the distinct possibility that the credit union will sustain some loss if the deficiencies are not corrected.  Loans in this category shall generally be listed in a range from zero to under 50 percent potential loss.

2)         Doubtful Loans – A loan classified doubtful has all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until a more exact status may be determined.  Loans in this category shall be listed at a minimum 50 percent potential loss.

3)         Loss Loans – Loans classified as loss loans are considered uncollectible and shall be listed at 100 percent potential loss.  Loans considered loss loans include, but are not limited to:

A)        Any loan 180 days or more delinquent without a payment of at least 75% of the contractual payment within the last 90 days.  Involuntary transfers from shares and proceeds from the sale of collateral and insurance settlement shall not be considered as payments.

B)        Any loan that is 180 days or more delinquent and referred to an attorney or a collection agency.

C)        Any loan which was previously 180 days or more delinquent, has been refinanced or extended and has subsequently become 90 days or more delinquent. In instances where a delinquent loan is refinanced or extended and does not fully and fairly disclose the delinquency as determined in a statutory examination of the credit union, the loan shall be immediately classified as a loss loan.

D)        Any loan with respect to which the borrower has filed a Chapter 7 bankruptcy petition and has been granted a discharge by the court.

E)         Any loan with respect to which the borrower has filed a Chapter 13 bankruptcy and the credit union has not received a payment within 180 days or more after the confirmation of the plan, unless the plan stipulates repayment of the loan in full and the credit union has determined from the Trustee that plan payments are being made on a timely basis to the Trustee but have not yet been disbursed to the credit union.

F)         Any loan with respect to which the borrower's whereabouts is unknown (a "skip") unless there is a comaker whose whereabouts is known and the loan is less than 180 days delinquent.

G)        Any loan where a "deficiency balance" has resulted from the sale of collateral or an insurance settlement unless there is documented evidence of periodic payments on a consistent basis in an amount sufficient to retire the deficiency balance in a reasonable time.

4)         Where there is evidence of collectibility of loans meeting the loss loans criteria of subsection (c)(3) of this Section, the credit union's records shall list the loans and classify them as substandard or doubtful and detail the evidence of collectibility used to exclude each loan from the loss loan category.  Evidence of collectibility shall be the following collection activities and remedies:

A)        Execution and filing of an enforceable reaffirmation agreement on the loan in a Chapter 7 bankruptcy proceeding prior to completion of the Division's loan analysis in any statutory examination of the credit union.

B)        Voluntary repayment of the loan pursuant to Section 524(f) of the federal Bankruptcy Code (11 USC 524(f)).

C)        Collection of the loan pursuant to repossession of collateral without judicial process, or by replevin, detinue, forcible entry and detainer or mortgage foreclosure proceedings.

D)        Collection of the loan pursuant to post-judgment enforcement remedies including wage deduction, garnishment and turnover orders entered in citation to discover assets supplementary proceedings.

E)         The entry of a judgment pay plan order providing for repayment of the loan in a judicial proceeding.

F)         Documented evidence of repayment of that portion of the loan covered by collateral protection or other insurance policies.

G)        Documented evidence of periodic payments on a consistent basis in an amount sufficient to retire the loan balance in a reasonable time.

5)         The Five Year Average Loss Ratio is computed by dividing a sum not exceeding the total of the past five year's net loan losses by a sum not exceeding the total of the last five year's December 31 loan balances.  The resulting ratio is to be multiplied by the total loans outstanding less the loans that have been classified individually or as pools of smaller balance homogeneous loans.  Based upon the asset cycle of the credit union, the credit union, after receiving the written approval from the Director, may adjust the historical time period to more accurately reflect the credit union's loan loss experience.  A new credit union not having a Five Year Average Loss Ratio for loss loans will be evaluated using available data.

A)        Before every dividend declaration or every closing date, all delinquent and bankrupt loans shall be individually classified as either substandard, doubtful or loss.  All loans classified as losses must be charged off to the ALL.

B)        In calculating the proportion of net income that shall be transferred to the Regular Reserve, any amounts already taken as PLL during the calendar year shall be subtracted from the statutory reserve transfer.  In the event the amount of PLL exceeds the statutory reserve transfer that has been calculated, an amount equivalent to the difference between the two shall be transferred from Regular Reserve to Undivided Earnings.

d)         Nothing in this Section shall be applicable to the establishment of an Allowance for Loan Losses account for business loans.  Business loans shall be classified pursuant to Section 190.165.

(Source:  Amended at 30 Ill. Reg. 18919, effective December 4, 2006)