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InfoSight Highlight: Other Real Estate Owned (OREO)
Friday, October 20, 2017 6:55 AM

What actions should federal credit unions take to ensure compliance with OREO accounting and auditing requirements?

According to the NCUA Examiner’s Guide, federal credit unions should account for and value foreclosed assets acquired by the credit union as OREO as follows:

  • Presume OREO is "held-for-sale." The credit union should obtain appraisals or broker price opinions and onsite inspections as warranted to support the value of the property in question. (Note: generally, federal credit unions cannot hold OREO for the production of income. Therefore, this discussion of the accounting rules for OREO is limited to OREO-held-for-sale).
  • Record OREO at foreclosure at fair value less estimated cost to sell. After foreclosure, the credit union should account for OREO held-for-sale at the lower of fair value minus estimated costs to sell, or at cost. Credit unions should periodically evaluate the property for impairment and write down its carrying value if warranted. Often, foreclosures need substantial refurbishments, such as new paint and carpeting, to make them marketable. Credit unions should factor estimated refurbishment costs into the carrying value.
  • Report as a liability the principal amount of any debt to which the OREO is subject and not deduct it from the carrying amount of the asset (i.e., tax lien, mechanic’s lien).

For federal credit unions under $10 million in assets, Section 300 of the NCUA Accounting Manual provides additional guidance and illustrations of accounting for OREO.

Pursuant to NCUA Letter to Credit Unions 08-CU-25, when determining the appropriate program and time frame for holding foreclosed assets, credit unions should perform a risk assessment and develop policies and procedures establishing overall limits and guidelines for the level of risk the credit union could sustain and still ensure continued safety and soundness. Credit unions should also take various factors into consideration when marketing foreclosed assets for sale.

Source:  InfoSight Compliance.

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