Are You Complying with the OCC's Accounting Requirements?

The Office of the Comptroller of the Currency (“OCC”) is an independent bureau within the United States Treasury Department. The OCC's primary mission is to charter, regulate, and supervise all national banks and federal savings associations (“banks”). One of the goals of the OCC is to ensure that banks operate in a safe and sound manner and in compliance with laws. See www.occ.treas.gov.

In order to ensure that banks are operating in a safe and sound manner, the OCC requires that banks follow generally accepted accounting principles.  The Office of the Chief Accountant at the OCC publishes its interpretations of generally accepted accounting principles in a publication entitled Bank Accounting Advisory Series (“BAAS”).  If a bank deviates from the OCC’s interpretations, it may be required to justify its reasons for the deviation to the OCC.  If the OCC disagrees with the bank’s practice, the OCC can force the bank to change its procedure, or the bank can appeal the OCC decision.

The BAAS generally addresses how banks should account for a debt included in a bankruptcy case.  Generally accepted accounting principles require creditors to recognize a loss when it is probable that a debt is impaired, or in other words, may not be repaid. 

One possible impairment is a chapter 7 secured debt that has been discharged. In a chapter 7 bankruptcy, a debtor may sign a reaffirmation agreement that is filed with the court that excepts the secured debt from discharge.  If a debtor does not sign a reaffirmation agreement, the secured debt is then discharged. Although the discharge of a secured debt does not eliminate a creditor's right to receive money on the liquidation of collateral, it does release the debtor from personal liability on that debt. A creditor retains its security interest in the collateral and may look to such collateral to satisfy the underlying obligation. 

In accounting for a secured debt that has been discharged in a chapter 7, the BAAS provides that a creditor should establish an Allowance for Loan and Lease Losses (“ALLL”) and charge off the excess of the loan’s balance over the fair market value of the collateral as uncollectable. A secured discharged debt is completely collateral dependent as the repayment depends solely on the value of the collateral. A creditor cannot attempt to collect against the other assets of a discharged debtor.

The BAAS may address accounting methods in general, but may not address your specific issues as it relates to accounting for bankruptcy issues.  As stated above, if a bank deviates from the OCC’s interpretations, the bank may be required to justify its reasoning for such deviation.  The bankruptcy group at Weltman can address these issues for your specific bankruptcy situation.  Potential issues can include how to account for cases with a non-filing co-debtor, when to value property, methods of valuation, and a host of others specific to your situation.