January 3, 2023
TO: ALL STATE CHARTERED CREDIT UNIONS
RE: TREATMENT OF REPOSSESSED ASSETS AND DEFICIENCY BALANCES
This letter is to address the Examiner's Finding found in Appendix A, or a very similar version, that has been issued to many state-chartered Wisconsin credit unions during the most recent regulatory examination cycle. It has come to the Office of Credit Union's attention that this Examiner's Finding has been cause for a lot of concern and has led to many different questions surrounding the treatment of repossessed vehicle loans. The purpose of this letter is to provide clarification on this matter.
When a credit union has deemed a member's vehicle loan as uncollectable, the vehicle must be repossessed by the credit union, and the member is entitled to a 15 day right of redemption to attempt to regain possession of the collateral. Upon the right of redemption expiring, the credit union is immediately required to write down the vehicle to the current fair market value, and any deficiency between the fair market value and the current loan balance must be charged off through the appropriate Allowance for Loan and Lease Losses Account “the Allowance". At this time, the loan must be transferred from the Loans section of the balance sheet and instead be reported as Foreclosed and Repossessed Assets “FRA".
Once a vehicle is transferred to FRA, the credit union should begin making efforts to sell the repossessed collateral. If the repossessed collateral is sold within six months of the vehicle being transferred to FRA, then the credit union can report any of the gains or losses from the sale or disposition of the asset, after including any reasonable costs to sell, as a Loan Recovery or Charge-off through the Allowance.
If the repossessed collateral is sold after six months of the vehicle being transferred to FRA, then any gain or loss on the sale or disposition of the asset must be reported as a Gain or Loss on the Disposition of Fixed Assets. These balances would not be run through the Allowance as a recovery or charge-off. Please note that this treatment is exclusively applicable to the reporting of consumer vehicle repossessions for a credit union's quarterly 5300 Call Reports. Credit unions must still follow all applicable State and Federal regulations related to troubled debt collections and repossessions. This accounting treatment does not require any changes to the current legal practices surrounding vehicle repossessions and fair credit reporting.
Director- OFFICE OF CREDIT UNIONS
|Finding Issue||Repossessed Assets and Deficiency Balances|
|Description||In accordance with GAAP, the call reporting instructions for foreclosed and repossessed assets state, “Initially record the assets at fair value (less costs to sell) at the date of foreclosure or repossession. This fair value (less cost to sell) becomes the “cost", or carrying amount, of the foreclosed or repossessed asset. The amount, if any, by which the recorded amount of the loan exceeds the fair value (less costs to sell) of the asset is a loss, which must be charged off to the allowance at the time of the foreclosure or repossession. If a repossessed or foreclosed long-lived asset is not sold shortly after it is received, any declines in value after foreclosure and any gain or loss from the sale or disposition of the asset shall not be reported as a loan loss or recovery and shall not be debited or credited to the ALLL." While the instructions require writing down to estimated net realizable sales value and moving to FRA account at the time of repossession, the Office of Credit Unions recognizes that members have a 15 day right of redemption period following the date of repossession under Wis. Stat. § 425.208. Therefore, it is reasonable to postpone recording the transfer of repossessed assets until the right to redemption period has expired.|
|Risk Area||Transaction Risk|
|Reference||GAAP and Call Report Instructions|
|Plan for Corrective Action|
1.Transfer all repossessed collateral accounts after expiration of redemption period to repossessed vehicles at the lower of loan balance or fair value less cost to sell. If the loan balance exceeds fair value less cost to sell, charge off the difference to the allowance account.
2.Ensure any gain or loss from the sale or disposition of the asset is not reported as a loan loss or recovery and is not debited or credited to the ALLL. Any gain or loss upon the disposition of fixed assets must be reported as Gain (Loss) on Disposition of Fixed Assets.
3.Charge off all deficiency balances