Posted By: obrienmj
Question:
In reviewing OCC bulletin 2000-20, which mostly deals with loan classification and the timing of charge-offs, we are unsure about the use of specific reserves on loans. We are a thrift saings & loan, formerly OTS regulated, and us specific reserves (i.e. not charge-offs) when necessary. The bulletin addresses this in a little carve out section for OTS, but is this still applicable? Can we still use specific reserves, or should we be following the rest of the guidance and charging these amounts off?
3 Answers
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Specific reserves on impaired loans are allowed by regulatory guidance under ASC 310-10-35, formerly FAS 114. By individually analyzing impaired loans with the fair market value of collateral or present value of future cash flows financial institutions can be very accurate and transparent with the reserve required per loan. As the OCC Bulletin (OCC 2000-20) indicates, regulatory agencies advise that the recognition of charge offs or recoveries happen quickly, around 120 – 180 days past due. Additionally, most financial institutions use appropriate risk characteristics (Substandard or worse risk graded loans, loans on TDR status, loans on Non Accrual status, loans that are 60 – 90 days delinquent) to identify impaired loans to analyze under specific reserve requirements before the loan is fully or partially charged off or gets close to the 120 – 180 day guideline.
Thank you, that is very helpful. One question to clarify though; can we carry the specific reserve past the 180 days PD mark, or are we required to perform a charge-off at that point? We usually keep our specific reserve on the loan until we take possession or the loan is settled otherwise. Is that acceptable practice?
I would recommend charging the loan off if you exceed 180 days on the PD mark which is in line with the guidance statement. I do see other institutions not following this by the book and I would mainly assess your practice of it would be based on the feedback from your regulators. I do see the benefit of waiting a bit longer than 180 days to gain access to the most accurate reserve and charge off amounts.