ALEXANDRIA, Va.–The NCUA Board has voted 3-0 in favor of a proposal to allow credit unions to capitalize interest on consumer mortgage loans in connection with loan modifications made during the pandemic.
Agency staff told the board prior to the vote that the capitalization of interest is a “much-needed” option to help borrowers stay in their homes.
The proposal only applies to loans where certain conditions exist, and Joe Goldberg, director of consumer compliance policy and outreach in Office of Consumer Financial Protection, told the board certain guardrails have been put in place for consumer protection.
Goldberg said among the lessons learned during the prior financial crisis of a decade ago is that capitalizing unpaid interest can save loans when implemented prudently.
“The term that gave modified loans the best chance of success was lower monthly payments…which benefitted both borrowers and lenders,” said Goldberg.
The Guardrails
According to agency staff, some of the guardrails that have been put in place include:
- Credit unions are required to adopt procedures and modifications that lead to a favorable outcome for borrowers.
- Credit unions must consider specific protections when capitalizing unpaid interest, including, most importantly, the ability to repay the debt. The rule does not prescribe a specific method for making that determination, which provides flexibility, staff said.
- Credit unions must apply with all applicable consumer laws.
- All documentation, including required disclosures, must be accurate, clear, conspicuous and consistent with federal and state laws.
- Credit reporting must be accurate.
- Under policies and procedures credit unions should consider options to permit borrowers to make payments at the end of the modifications to avoid adverse consequences.
Staff said one provision will remain the same and that is the heightened scrutiny by NCUA examiners when a credit union modifies a loan more than once a year or twice in five years.
Seeking Comment
NCUA said it is seeking comment on several questions:
- What experiences has your credit union had in capitalizing interest?
- How likely are you to incorporate interest capitalization as a mortgage modification tool?
- What risk do you see this change representing to the credit union and the borrower?
NAFCU Response
“Americans are still experiencing severe financial hardships as a result of the coronavirus pandemic, and they need solutions that will help them manage the financially rocky months ahead,” said NAFCU Director of Regulatory Affairs Ann Kossachev. “The NCUA board’s proposed rule allowing credit unions and their members to use capitalized interest during loan modifications and TDRs will provide members with a safe, sound solution with strong consumer protections. We thank the NCUA Board for working to provide relief to credit unions and their members, and we look forward to commenting on the proposal to ensure that it is not burdensome to implement.”
CUNA Response
“We thank NCUA for issuing this proposal which gives credit unions a more member-friendly option to make a loan modification," said CUNA President/CEO Jim Nussle. "CUNA strongly supports this option as the pandemic effects will be felt for months and years to come. We hope that NCUA will quickly finalize this proposed rule so that needed pandemic relief is not further delayed.”