A Reminder of California Credit Union Charge-off Obligations
The country continues to face a significant economic downturn as a result of shutdowns of non-essential businesses during the COVID-19 pandemic. To alleviate the financial stress of borrowers, on March 22, 2020, federal regulators released a statement which encouraged lenders to provide short term modifications of up to six months. However, as members continue to request assistance past 180 days, California credit unions should be mindful of charge-off obligations in California Code of Regulations, Title 10 § 30.402.
Section 30.402 provides that charge-offs are mandatory at specific time thresholds. Most relevant is the obligation to charge off at 180 days without reducing the principal balance, or sooner if the Board determines the obligation to be uncollectable. However, a failure to reduce the principal balance may not require a charge-off under § 30.402(D) if the contract creating the obligation does not require a reduction in the principal balance of the obligation but provides for the principal balance to be paid off at the time the obligation matures. This can be an important exception in the current environment.
During the last economic downturn, the DBO scrutinized loan deferrals on a case-by-case basis in light of § 30.402. To avoid potential violations, California credit unions must ensure that any payment arrangements which may be extended up to or beyond 180 days are reflected in a contractual agreement which complies with § 30.402(D) and requires the principal balance to be paid at maturity. Alternatively, credit unions should ensure that a borrower make at least one payment which reduces principal before the 180-day period expires and before entering into a further forbearance agreement. Credit unions must maintain documentation to establish compliance for its modification agreements.