ALEXANDRIA, Va.–NCUA has sent a Letter to Credit Unions with a Q&A related to its recent move to lift the prohibition of capitalization of interest in connection with loan workouts and modifications from part 741, Appendix B.
Effective July 30, the rule applies to loan workouts and modifications on or after the date. In the Letter, NCUA said the rule establishes documentation requirements to help ensure that the addition of unpaid interest to the principal balance of a loan does not hinder the borrower’s ability torepay the loan.
“For borrowers experiencing financial hardship, a prudently underwritten and appropriately managed loan modification, consistent with safe and sound lending practices, is generally in the long-term best interest of both the borrower and the credit union,” the Letter states.
“Modification options include lowering of loan payments or the interest rate, extending the maturity date, partial principal or interest forgiveness, and capitalization of interest. Such modifications may allow a borrower to repay the loan, which helps the borrower and the credit union avoid the costs of default and foreclosure.”
NCUA reminded the final rule continues to prohibit credit unions from financing credit union fees and commissions. Credit unions 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. Maintaining the prohibition on the capitalization of credit union fees is an important consumer protection feature ofthe rule for member borrowers, the agency said.
Among other issues addressed in the Letter:
Consumer Protection Considerations
NCUA said the final rule requires credit unions to adopt policies and procedures to ensure that loan modifications are in the long-term best interest of the borrowers. All documentation, including required disclosures, must be accurate, clear and conspicuous, and consistent with applicable federal and state laws and regulations.
The Letter also addresses issues related to loan modifications.
Credit Risk Considerations
NCUA said regulations part 741, Appendix B, applies to all consumer and commercial loans. Credit unions should document why capitalizing interest is the best course of action when determining the terms of the modification. Further, the rule requires the credit union’s policy ensure that a credit union makes loan workout decisions based on a borrower’s renewed willingness and ability to repay the loan, NCUA stated.
“A credit union’s policy must also establish limits on the number of modifications permitted for an individual loan,” the Letter reads. “If a credit union restructures an individual loan more than once a year or twice in five years, examiners will expect the documentation to reflect the borrower’s continued willingness and ability to repay the loan.”
The agency added it NCUA continues to encourage credit unions to work with their members who are experiencing financial difficulties due to the COVID-19 pandemic using safe and sound approaches.
The Letter concludes with a set of Q&As.