The OCC has issued guidance to clarify supervisory expectations for national banks and federal savings associations in situations where secured consumer debt is discharged under Chapter 7 bankruptcy proceedings. The guidance issued on February 14 in OCC Bulletin 2014-4 describes the analysis necessary to “clearly demonstrate and document that repayment is likely to occur” to avoid the charge-off that would otherwise be required by the OCC’s Uniform Retail Credit Classification and Account Management Policy. That policy requires that loans in bankruptcy be written down to collateral value (less costs to sell) within 60 days of notification from the bankruptcy court, unless the bank can clearly demonstrate and document that repayment will likely occur. According to the guidance, when full payment of principal and interest is not expected, the bank should place the loans on nonaccrual or follow other acceptable methods to ensure that revenue recognition is not overstated. Any balance not charged off should be classified substandard, according to the guidance. In terms of analyzing whether repayment is likely to occur, the OCC said that banks should consider all facts and circumstances and three specific factors. The first factor in the analysis is the existence of orderly repayment terms without the existence of undue payment shock or the need to refinance a balloon amount. The second is a history of payment performance that demonstrates the debtor’s ongoing commitment to satisfy the debt before and through the bankruptcy proceeding. The third is the consideration of post-discharge capacity that indicates that the debtor can make future required payments from recurring, verified income. 

Nutter Notes: The guidance also describes when a bank may consider post-discharge payment performance as evidence of collectability and when this performance demonstrates both capacity and willingness to repay the full amounts due. A nonaccrual asset may be restored to accrual status if the loan meets certain return-to-accrual conditions, including a reasonable expectation of repayment, that may be based on post-discharge payment performance. According to the guidance, a bank’s analysis may be performed at a pool or individual loan level, as long as the bank considers monthly payments of both principal and interest that fully amortize the remaining debt, sustained performance and collateral levels. The guidance advises that payment performance that consists of interest-only payments or terms that require balloon amounts raise questions about whether collection of loan principal is reasonably assured. Sustained performance means that the debtor’s post-discharge payment performance clearly demonstrates ongoing capacity and willingness to repay after the bankruptcy discharge, according to the guidance. Timely post-discharge payments for a minimum of 6 months are required to provide evidence of willingness and ability to repay under applicable call report instructions. Finally, the value of collateral must support the likelihood that the bank will recover the full amount due even if payments cease, according to the guidance. The OCC said that a bank that has prudently considered and documented these factors and any other relevant facts and circumstances and concluded that full repayment of the remaining principal and interest (including any previously charged-off amounts) will occur may return the loan to accrual status.