Compliance Blog

During its June 2021 open meeting, the National Credit Union Administration (NCUA) Board approved a final rule eliminating the prohibition on the capitalization of interest in loan workouts and modifications. The final rule was published in the Federal Register on June 30, 2021, and the rule will be effective July 30, 2021.

NAFCU previously blogged about the proposed rule back in December, and the preamble to the final rules notes that the NCUA Board adopted the proposed rule without making any changes. The final rule amends Appendix B to Part 741 of NCUA’s rules and regulations. Appendix B sets forth NCUA’s expectations regarding loan workouts, a credit union’s nonaccrual policy, and the regulatory reporting of troubled debt restructured loans. In its current form, Appendix B prohibits federally insured credit unions from implementing loan workout policies that “authorize additional advances to finance unpaid interest and credit union fees.” The final rule eliminates the prohibition, but only with respect to the capitalization of interest. The preamble to the final rule is very clear that the prohibition still applies to credit union fees and commissions:

“The final rule continues to provide that a [federally insured credit union] may not, under any event, authorize additional advances to finance credit union fees and commissions. [Federally insured credit union]s will be permitted to continue to make advances to cover third party fees to protect loan collateral, such as force-placed insurance or property taxes. The Board believes that maintaining the prohibition on the capitalization of credit union fees is an important consumer protection feature of the rule for member borrowers.”

The NCUA Board noted that several of the existing requirements applicable to all loan workout policies in Appendix B still govern loan modifications capitalizing interest. Those requirements include balancing the best interests of the federally insured credit union and the borrower, limiting the number of times a single loan can be modified, basing the modification decision on a borrower’s willingness and ability to pay the modified loan, documenting the borrower’s willingness and ability, etc.

In addition to these existing requirements, the final rule describes a set of minimum requirements that must be included in a federally insured credit union’s loan modification policy if it permits capitalization of interest:

• Complying with all applicable consumer protection laws and regulations, including any relevant state laws that may not be preempted by NCUA’s lending rule;
• Documenting a borrower’s ability to pay the modified payments, the sources of repayment, and, if appropriate, compliance with the credit union’s valuation policies and procedures when the loan is modified;
• Providing documentation about modifications “that is accurate, clear, and conspicuous and consistent with Federal and state consumer protection laws[;]”
• Reporting modified loans in compliance with applicable law and governing accounting practices;
• Having prudent policies and procedures designed to assist borrowers make reasonable and affordable payments while minimizing the credit union’s losses, and these policies and procedures must assess:
  • The design of the loan modifications and whether they are consistently applied and result in beneficial outcomes for the borrowers;
  • The options that might exist for borrowers to repay delinquent payments at the end of the modification term;
• Establishing safety and soundness controls to prevent:
  • Concealing issues with the quality of the loan portfolio and undercalculating charge-offs;
  • Impeding recognition of losses and understating a credit union’s allowance for loan and lease losses or allowance for credit losses after CECL implementation;
  • Inflating net income and net worth; and
  • Bypassing the credit union’s internal controls.

The final rule also made “several technical changes to Appendix B to improve its clarity and update certain references.”

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