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NAFCU Board of Directors Chair Debra Schwartz and NAFCU's Regulatory Committee Tuesday called on the NCUA to "act quickly to issue an interim final rule [IFR] permitting credit unions to capitalize interest" when it comes to troubled debt restructurings (TDRs) and loan modifications. Schwartz and the committee noted that credit unions are working to assist borrowers affected by the coronavirus pandemic, and are likely to see an increase in loan modifications and TDRs as borrowers exit forbearance or payment deferral programs.

The capitalization of interest issue falls under Appendix B to Part 741, which contains the NCUA's Interpretive Rule and Policy Statement (IRPS) on Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans.

Schwartz, president and CEO of Mission Federal Credit Union (San Diego, Calif.), and the committee highlighted that financial institution regulators have issued guidance amid the pandemic to provide flexibility and relief for reporting TDRs.

"The NCUA's current interpretation of Appendix B to Part 741 poses challenges for both borrowers and credit unions and makes it harder for credit unions to work prudently with their members who may not be able to meet their loan payment obligations due to the effects of COVID-19," they wrote. "Permitting credit unions to capitalize interest in a loan modification allows them to work with borrowers in a safe and sound manner and provide an option that will mitigate adverse effects on the borrower."

NAFCU recommended the NCUA issue an IFR to reinterpret this language "to permit the capitalization of interest to align with [Generally Accepted Accounting Principles (GAAP)], the practices of Fannie Mae and Freddie Mac…and the other banking regulators." Doing so would "provide credit unions with immediate access to this option, eliminating unnecessary hardship and confusion for borrowers and additional challenges for credit unions," they added.

Schwartz and the committee detailed the options currently available to credit unions once forbearance ends, but argued that they "are not beneficial for the borrower or the institution." Options highlighted include:

• trying to capture the deferred interest first as the borrower resumes making payments, which could result in negative loan amortization;
• requiring the borrower to pay deferred interest up front or on a shortened term, which places additional payment burdens on borrowers still facing hardships and operational burdens on credit unions;
• creating a balloon payment at maturity, which the member may not be able to pay off without an additional modification, creating an unfavorable member experience and operational burdens for credit unions;
• extending the loan by roughly the number of payments deferred, which still produces additional interest paid by the borrower and operational burdens and long-term opportunity costs on credit unions; and
• bifurcating the loan and creating a separate, non-interest-bearing loan for the deferred interest with the same term as the original or modified loan, which has a significant negative impact on the borrower and poses operational challenges on the credit union.

Read the full letter here.

The CARES Act provided relief for reporting TDRs and NAFCU is supportive of legislative efforts to extend this relief in future coronavirus relief packages.