In the matter of Allowance and Reserve Accounts

Issued and entered this 10th day of June 2005
By Linda A. Watters, Commissioner

This bulletin supercedes Bulletin No.91-2

The purpose of this bulletin is to clarify the various reserves covered in Section 386 of the Michigan Credit Union Act, 2003 PA 215, as amended, MCL 490.386, and to set forth reserve requirements for safe and sound operation of domestic credit unions.

Allowance for Loan and Lease Loss Account
Section 386(2) of the Michigan Credit Union Act, MCL 490.386(2), requires credit unions to establish an allowance for loan and lease loss account based on reasonably foreseeable loan and lease losses in accordance with generally accepted accounting principles. Statement of Financial Accounting Standards No. 5 requires that the ALLL account be accrued if loan losses are probable and the amount of loss can be reasonably estimated. It further states that the reasonable estimation of loss depends upon, among other things, loan loss experience of the credit union, information about the ability of individual debtors to pay, and other economic factors.

OFIS believes an adequate determination of loan losses must include both an individual appraisal of specifically identified loans and an estimate of losses inherent in the loan portfolio based upon historical loan loss experience of the institution.

The allowance for loan and lease loss account must be calculated pursuant to the provisions contained in Michigan Credit Union Rule 7, R 490.117 of the Michigan administrative code. Someone other than the responsible loan officer must perform the appraisal of individual loans. Factors to consider when determining collectability include the borrower’s ongoing capacity to service the debt and the value of collateral securing the loan. Interest and fines must be excluded from the appraisal amount.

For the experience component, the calculation should be based upon the historical average net loss ratio of the previous five years unless management can justify that a five-year average does not reasonably approximate the credit union’s loss experience. Net charge off ratios for the prior five years, shown on a credit union’s Financial Performance Report, may be used for this purpose.

Any deviation in the allowance for loan and lease loss calculation proscribed in Rule 7, R 490.117, must be in compliance with generally accepted accounting principles and supported in writing by the certified public accountant or other professionally-qualified individual who performed the most recent audit of the credit union.

All amounts recovered from charged-off loans shall be placed in the allowance for loan and lease loss account until the amount charged has been replenished.

Special Reserves
Section 386(3) of the Michigan Credit Union Act, MCL 490.386(3), requires credit unions to establish special reserves to protect interests of members if required by rule of the Commissioner or if the Board or Commissioner decides a special reserve is necessary. Upon resolution recorded in its minutes, the Board of Directors may establish, change, or rescind special reserve accounts. Charges to special reserve accounts shall also be made upon resolution recorded in the minutes of the Board of Directors.

Any questions regarding this bulletin should be directed to:

Office of Financial and Insurance Services
Credit Union Division
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720

Phone: (517) 373-6930
Toll Free: (877) 999-6442

Signed: Linda A. Watters
Commissioner of Financial and Insurance Services