Impaired Real Estate Loan Workouts/Modifications

PURPOSE

The purpose of this policy is to define the policies, guidelines and

limitations specific to the handling of workouts and modifications

on loans secured by real property.

Guidelines

Workout and loan modifications are generally used to assist members who have experienced a change in their financial situation that affects their ability to meet their original loan terms. The member must have the capacity to make regular payments under a modification agreement.

The member does not have to be delinquent on their loan to qualify for a workout or modification if the credit union can determine through analysis of the members finances that a hardship exists.

When a workout or modification is made, the current loan terms are amended to meet the member’s ability to repay the loan. This custom tailored loan may include:

  • Lowering the monthly payment for a period of time
  • Permanently lowering the monthly payment
  • Deferring payments or interest for a period of time
  • Extending the length of time for repayment of the loan
  • Re-writing the loan that may include consolidation of other credit union loans
  • Increasing or decreasing the rate of interest charged

The goal of the credit union is to maximize the probability that the member will repay the loan(s) so that we will not incur a loss.

In all cases, a new application, credit report, and income verification will be obtained to accurately determine the member’s current financial status. This type of loan is never to be used to mask credit union delinquency rates or for the sole purpose of removing delinquent loans from the credit union delinquent loan report.

Underwriting

It is important to structure the workout/modification loan to ensure that it will be repaid as agreed with the member. To accomplish this, a full evaluation of the member’s current financial condition must be performed in order to establish the amount that the member will be able to repay each month.

The following steps will be followed for each real estate loan workout/modification request:

  1. Obtain a new loan application including a separate sheet showing all additional monthly expense including utilities, gas, food, etc.
  2. Verify income (example: paystubs, two years tax returns, and two months bank statements)
  3. Complete a credit counseling session with the member(s) in person by reviewing their income and expenses in detail. Determine why they are experiencing financial problems to verify whether a workout loan is the right solution. For example, if the borrower(s) are unemployed, no amount of modification will likely help.
  4. An electronic online appraisal will be obtained. The maximum CLTV will not exceed 150% without approval from the executive management.
  5. Typical workouts/modifications will include PSFCU loans only. This may include modifying existing loans or rewriting and consolidating multiple credit unions. Occasionally additional funds may be added to existing credit union loans in order to consolidate non-credit union debt. This should only be done in rare instances to bring debt ratios and or disposable income to an acceptable level. The maximum CLVT when new funds are issued is 100% without approval of the executive management.
  6. It is important to determine repayment capacity. Maximum debt ratios after the modification should be below 50% where possible with positive disposable income. It is important that both the credit union and member agree on the modified payment amount.
  7. Workout/modification loans are designed to keep the member in their home and prevent a loss to the credit union. Therefore, outside of limiting the term of the loan to a maximum of 40 years, PSFCU will attempt to make all other reasonable attempts to modify a loan to prevent a foreclosure and subsequent loss to the credit union.

Other Actions

  1. No new loans will be made to a member with a hardship/workout loan until the loan has been paid in a satisfactory manner for a minimum of twelve months. Any open lines of credit will be shut down and courtesy pay will be revoked.
  1. Because these loans present a greater risk and have terms and conditions that normally do not conform to the Credit Unions general guidelines, the loan will be given a separate purpose code and tracked separately from other loans.
  1. A separate loan category will be created in the Allowance for Loan Loss calculations to properly account for possible losses.
  1. Any third party fee’s that result from rewriting a workout loan may be added to the balance.