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.