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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Hello, this is Samantha shares.
This episode covers NCUA's
letter to credit unions.
Number 23, CU07 titled
capitalization of unpaid interest.
The following is an audio
version of that letter.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions, Inc., whose team has
over 240 years of national credit
union administration experience.
We assist our clients with NCUA
so they save time and money.
If you are worried about a recent,
upcoming, or in process NCUA
examination, reach out to learn how
they can assist at marktreichel.
com.
Also check out our other podcast called
With Flying Colors, where we provide
tips on how to achieve success with NCUA.
While this letter is three years
old, it is still active and relevant.
And now the letter.
Capitalization of unpaid interest.
Dear Boards of Directors and
Chief Executive Officers.
On June 24, 2021, the NCUA Board
unanimously voted to lift the prohibition
of capitalization of interest in
connection with loan workouts and
modifications from regulation.
The rule became effective July 30,
2021 and applies to loan workouts and
modifications on or after this date.
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 to repay 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.
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.
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 of the rule for member borrowers.
Consumer Protection Considerations 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.
Any adverse credit reporting must be
accurate and comply with the requirements
of the Fair Credit Reporting Act
and, when applicable, state law.
Credit risk considerations.
This regulation 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.
A credit union's policy must
also establish limits on
the number of modifications
permitted for an individual loan.
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 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.
Therefore, the agency 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.
Please contact your examiner, your
regional office, or your state supervisory
authority if you have questions.
Next, we provide the question
and answer portion of the letter.
Question and answer.
Question.
What is required in a loan
modification policy that permits
capitalization of interest?
Answer.
Prudent loan modification policies
and procedures help borrowers resume
affordable, sustainable payments by
using an appropriate structure to
meet the needs of the borrower while
minimizing losses to the credit union.
Consistent with the final rule, the
policy should have explicit language
prohibiting the authorization of
additional advances to finance
credit union fees and commissions.
Procedures will include providing
borrowers with written disclosures that
are accurate, clear, and conspicuous
in accordance with federal and state
consumer protection laws and regulations.
Additionally, policy and procedures
will have standards for appropriate
documentation that reflect a borrower's
ability to repay, a borrower's
sources of repayment, and when
appropriate, compliance with the
credit union's valuation policies at
the time the modification is approved.
The updated regulation says if we
capitalize interest, we have to
analyze whether the borrower has
the ability to repay the debt.
It sounds like we need to
re underwrite the loan.
How does the credit union determine
the ability to repay the debt?
Answer.
There is no change to the requirement
to document whether the borrower
is able to repay the debt.
The final rule does not prescribe a method
for making that determination, as it
provides flexibility to the credit union.
However, the credit union should
maintain documentation in the loan
file reflecting how it made that
determination, including evidence
of the borrower's source of income.
We would expect this documentation
to follow loan guidelines such as
debt to income ratio or debt service
coverage ratio, proof of income,
budgets, and business projections,
among other items as needed.
Question.
What disclosures should a credit union
provide a borrower for a loan modification
that includes capitalized unpaid interest?
Answer.
The final rule does not require the use
However, regulations X and Z may apply to
some modifications, so a credit union must
comply with the applicable disclosure and
notice requirements of those regulations.
The terms of the modification will
dictate which, if any, disclosures or
notices the credit union will provide.
All disclosures and notices must be
accurate, clear, and conspicuous.
Answer.
The following approaches, among
others, may be acceptable.
Capitalization of deferred interest
and adjusting monthly payments upward.
Capitalization of deferred interest
and extending the loan term or Break
out deferred interest into a separate
note, provided collateral is adequate
or have an unsecured note as needed.
The payments on the separate note may
be concurrent or could be deferred
until a future date, either specified
or upon repayment of the primary note.
When choosing a method, the federally
insured credit union should fully
understand the implications for the
various choices including, but not
limited to, consistency with safe and
sound credit underwriting standards,
impacts on the timing of interest
recognition, impacts on collateral
coverage, including when a secured loan
is extended beyond its original terms and
Impacts on accrual status and potential
cross defaults when notes are bifurcated.
This concludes the Enqueue a Letter.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at marktreichel dot com.
This is Samantha Shares and
we thank you for listening.
Hello, this is Samantha shares.
This episode covers NCUA's
letter to credit unions.
Number 23, CU07 titled
capitalization of unpaid interest.
The following is an audio
version of that letter.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions, Inc., whose team has
over 240 years of national credit
union administration experience.
We assist our clients with NCUA
so they save time and money.
If you are worried about a recent,
upcoming, or in process NCUA
examination, reach out to learn how
they can assist at marktreichel.
com.
Also check out our other podcast called
With Flying Colors, where we provide
tips on how to achieve success with NCUA.
While this letter is three years
old, it is still active and relevant.
And now the letter.
Capitalization of unpaid interest.
Dear Boards of Directors and
Chief Executive Officers.
On June 24, 2021, the NCUA Board
unanimously voted to lift the prohibition
of capitalization of interest in
connection with loan workouts and
modifications from regulation.
The rule became effective July 30,
2021 and applies to loan workouts and
modifications on or after this date.
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 to repay 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.
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.
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 of the rule for member borrowers.
Consumer Protection Considerations 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.
Any adverse credit reporting must be
accurate and comply with the requirements
of the Fair Credit Reporting Act
and, when applicable, state law.
Credit risk considerations.
This regulation 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.
A credit union's policy must
also establish limits on
the number of modifications
permitted for an individual loan.
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 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.
Therefore, the agency 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.
Please contact your examiner, your
regional office, or your state supervisory
authority if you have questions.
Next, we provide the question
and answer portion of the letter.
Question and answer.
Question.
What is required in a loan
modification policy that permits
capitalization of interest?
Answer.
Prudent loan modification policies
and procedures help borrowers resume
affordable, sustainable payments by
using an appropriate structure to
meet the needs of the borrower while
minimizing losses to the credit union.
Consistent with the final rule, the
policy should have explicit language
prohibiting the authorization of
additional advances to finance
credit union fees and commissions.
Procedures will include providing
borrowers with written disclosures that
are accurate, clear, and conspicuous
in accordance with federal and state
consumer protection laws and regulations.
Additionally, policy and procedures
will have standards for appropriate
documentation that reflect a borrower's
ability to repay, a borrower's
sources of repayment, and when
appropriate, compliance with the
credit union's valuation policies at
the time the modification is approved.
The updated regulation says if we
capitalize interest, we have to
analyze whether the borrower has
the ability to repay the debt.
It sounds like we need to
re underwrite the loan.
How does the credit union determine
the ability to repay the debt?
Answer.
There is no change to the requirement
to document whether the borrower
is able to repay the debt.
The final rule does not prescribe a method
for making that determination, as it
provides flexibility to the credit union.
However, the credit union should
maintain documentation in the loan
file reflecting how it made that
determination, including evidence
of the borrower's source of income.
We would expect this documentation
to follow loan guidelines such as
debt to income ratio or debt service
coverage ratio, proof of income,
budgets, and business projections,
among other items as needed.
Question.
What disclosures should a credit union
provide a borrower for a loan modification
that includes capitalized unpaid interest?
Answer.
The final rule does not require the use
However, regulations X and Z may apply to
some modifications, so a credit union must
comply with the applicable disclosure and
notice requirements of those regulations.
The terms of the modification will
dictate which, if any, disclosures or
notices the credit union will provide.
All disclosures and notices must be
accurate, clear, and conspicuous.
Answer.
The following approaches, among
others, may be acceptable.
Capitalization of deferred interest
and adjusting monthly payments upward.
Capitalization of deferred interest
and extending the loan term or Break
out deferred interest into a separate
note, provided collateral is adequate
or have an unsecured note as needed.
The payments on the separate note may
be concurrent or could be deferred
until a future date, either specified
or upon repayment of the primary note.
When choosing a method, the federally
insured credit union should fully
understand the implications for the
various choices including, but not
limited to, consistency with safe and
sound credit underwriting standards,
impacts on the timing of interest
recognition, impacts on collateral
coverage, including when a secured loan
is extended beyond its original terms and
Impacts on accrual status and potential
cross defaults when notes are bifurcated.
This concludes the Enqueue a Letter.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at marktreichel dot com.
This is Samantha Shares and
we thank you for listening.