R337.  Financial Institutions, Credit Unions.
R337-5.  Allowance for Loan and Lease Losses - Credit Unions.
R337-5-1.  Authority, Scope and Purpose.
	(1)  This rule is issued pursuant to Section 7-9-29.
	(2)  This rule applies to all state-chartered credit unions.
	(3)  This rule requires the allowance account for loan and lease losses (ALLL) be maintained in accordance with Generally Accepted Accounting Principles (GAAP).

R337-5-2.  Definitions.
	(1)  "Adjusted Loss" means the historical loss adjusted for economic or other factors.
	(2)  "Historical Loss" means the ratio of loan losses (actual losses less recoveries) to the average total loans outstanding for the period.
	(3)  "Homogeneous Loan Pools" means groups of loans sharing common risk factors.
	(4)  "In process of collection" means collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
	(5)  "Well secured" means a debt that is secured by:
	(a)  collateral with sufficient realizable value to discharge the debt in full, including accrued interest; or
	(b)  the guarantee of a financially responsible party.

R337-5-3.  Allowance Account for Loan and Lease Losses.
	(1)  Each credit union is required to establish and maintain a methodology to determine the amount needed in an allowance account for loan and lease losses in accordance with GAAP.  The account should be shown on the books as a contra-asset account, not an equity account.  In determining the appropriate allowance account balance, each credit union shall:
	(a)  Separate the loan portfolio into homogeneous loan pools based upon common risk factors;
	(b)  Calculate the net loss percentage of each pool, using the historical loss or adjusted loss method, and apply that percentage to all loans in that pool;
	(c)  Individually classify loans with unique characteristics; and
	(d)  Add the resulting amounts to determine the amount needed in the ALLL.
	(2)  At least annually, the method used by the credit union to determine the ALLL must be validated by a qualified party independent from the estimation process.
	(3)  Sufficient documentation must be maintained to support the methodology and allow the ALLL to be validated.
	(4)  In conjunction with this rule, the credit union's Board of Directors must adopt a policy ensuring that loans are written off in a timely manner.  The policy should include as a minimum a requirement that loans be charged off at 180 days past due unless well secured and in the process of collection.
	(5)  Whenever the allowance account for loan and lease losses is materially less than or greater than collection problem loans or does not fairly represent the estimated losses in the portfolio, an immediate adjustment shall be made for the amount of the deficiency or surplus.  Adjustments to the account will be accomplished by debit or credit entries to a "Provision for Loan Losses" expense account in accordance with generally accepted accounting principles.
	(6) At the close of each accounting period and prior to the payment of a dividend, a credit union shall make a placement to the regular reserve as required by Section 7-9-30.  After the required placement has been made, unless the credit union is under prompt corrective action, a credit union may transfer from the regular reserve to undivided earnings, the amount that has been expended to the provision for loan and lease losses during the same period.
	(7)  The regular reserve and allowance for loan and lease losses shall not be combined for purposes of calculating the placement to the regular reserve as required by Section 7-9-30.

KEY:  credit unions, loans
Date of Enactment or Last Substantive Amendment:  September 5, 2003
Notice of Continuation:  September 5, 2017
Authorizing, and Implemented or Interpreted Law:  7-9-29