Compliance: Start from a place of ‘yes’

Compliance: NCUA issues letter on capitalization of unpaid interest

August 9, 2021

NCUA finalized a CUNA-supported rule lifting the prohibition of capitalization of interest in connection with loan workouts and modifications in June. The agency sent a Letter to Credit Unions (21-CU-07) last week on the rule, which became effective July 30 and applies to loan workouts or modifications on or after that date.

“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 reads. “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,” it adds.

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.

“The 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 reads “Therefore, the NCUA will not object to previous loan modifications, including interest capitalization, prior to the effective date of this rule change if such efforts are conducted in a reasonable manner with proper controls and management oversight.”

The letter also details consumer protection and credit risk considerations stemming from the rule.