WEBVTT

NOTE
This file was generated by Descript 

00:00:08.003 --> 00:00:09.983
Hello, this is Samantha shares.

00:00:10.583 --> 00:00:14.043
This episode covers NCUA's
letter to credit unions.

00:00:14.053 --> 00:00:18.513
Number 23, CU07 titled
capitalization of unpaid interest.

00:00:18.903 --> 00:00:21.343
The following is an audio
version of that letter.

00:00:21.843 --> 00:00:24.883
This podcast is educational
and is not legal advice.

00:00:25.378 --> 00:00:29.388
We are sponsored by Credit Union
Exam Solutions, Inc., whose team has

00:00:29.388 --> 00:00:34.248
over 240 years of national credit
union administration experience.

00:00:34.658 --> 00:00:38.328
We assist our clients with NCUA
so they save time and money.

00:00:38.618 --> 00:00:42.558
If you are worried about a recent,
upcoming, or in process NCUA

00:00:42.558 --> 00:00:46.238
examination, reach out to learn how
they can assist at marktreichel.

00:00:46.268 --> 00:00:46.688
com.

00:00:47.148 --> 00:00:51.058
Also check out our other podcast called
With Flying Colors, where we provide

00:00:51.078 --> 00:00:54.058
tips on how to achieve success with NCUA.

00:00:54.478 --> 00:00:58.248
While this letter is three years
old, it is still active and relevant.

00:00:58.658 --> 00:00:59.628
And now the letter.

00:01:00.018 --> 00:01:02.158
Capitalization of unpaid interest.

00:01:02.578 --> 00:01:05.648
Dear Boards of Directors and
Chief Executive Officers.

00:01:06.088 --> 00:01:11.518
On June 24, 2021, the NCUA Board
unanimously voted to lift the prohibition

00:01:11.518 --> 00:01:14.868
of capitalization of interest in
connection with loan workouts and

00:01:14.868 --> 00:01:16.538
modifications from regulation.

00:01:17.058 --> 00:01:21.938
The rule became effective July 30,
2021 and applies to loan workouts and

00:01:21.948 --> 00:01:24.258
modifications on or after this date.

00:01:24.708 --> 00:01:28.268
The rule establishes documentation
requirements to help ensure that

00:01:28.268 --> 00:01:31.608
the addition of unpaid interest
to the principal balance of a loan

00:01:31.758 --> 00:01:34.668
does not hinder the borrower's
ability to repay the loan.

00:01:35.133 --> 00:01:38.973
For borrowers experiencing financial
hardship, a prudently underwritten

00:01:39.003 --> 00:01:42.623
and appropriately managed loan
modification consistent with safe and

00:01:42.623 --> 00:01:46.883
sound lending practices is generally
in the long term best interest of both

00:01:46.893 --> 00:01:48.583
the borrower and the credit union.

00:01:49.013 --> 00:01:53.103
Modification options include lowering
of loan payments or the interest rate,

00:01:53.283 --> 00:01:57.013
extending the maturity date, partial
principal or interest forgiveness,

00:01:57.073 --> 00:01:58.663
and capitalization of interest.

00:01:59.193 --> 00:02:03.233
Such modifications may allow a borrower
to repay the loan, which helps the

00:02:03.233 --> 00:02:07.253
borrower and the credit union avoid
the costs of default and foreclosure.

00:02:07.663 --> 00:02:11.243
The final rule continues to prohibit
credit unions from financing

00:02:11.243 --> 00:02:13.163
credit union fees and commissions.

00:02:13.643 --> 00:02:16.713
Credit unions will be permitted
to continue to make advances to

00:02:16.713 --> 00:02:20.393
cover third party fees to protect
loan collateral, such as force

00:02:20.393 --> 00:02:22.553
placed insurance or property taxes.

00:02:23.048 --> 00:02:26.678
Maintaining the prohibition on the
capitalization of credit union fees

00:02:26.848 --> 00:02:30.608
is an important consumer protection
feature of the rule for member borrowers.

00:02:31.228 --> 00:02:35.948
Consumer Protection Considerations The
final rule requires credit unions to

00:02:35.948 --> 00:02:40.298
adopt policies and procedures to ensure
that loan modifications are in the long

00:02:40.298 --> 00:02:42.168
term best interest of the borrowers.

00:02:42.618 --> 00:02:46.988
All documentation, including required
disclosures, must be accurate, clear and

00:02:46.988 --> 00:02:51.548
conspicuous and consistent with applicable
federal and state laws and regulations.

00:02:52.038 --> 00:02:56.158
Any adverse credit reporting must be
accurate and comply with the requirements

00:02:56.158 --> 00:02:59.908
of the Fair Credit Reporting Act
and, when applicable, state law.

00:03:00.353 --> 00:03:01.963
Credit risk considerations.

00:03:02.293 --> 00:03:05.783
This regulation applies to all
consumer and commercial loans.

00:03:06.263 --> 00:03:09.843
Credit unions should document why
capitalizing interest is the best

00:03:09.843 --> 00:03:13.033
course of action when determining
the terms of the modification.

00:03:13.483 --> 00:03:16.513
Further, the rule requires
the credit union's policy.

00:03:16.573 --> 00:03:19.848
Ensure that a credit union makes
loan workout decisions based on

00:03:19.848 --> 00:03:23.443
a borrower's renewed willingness
and ability to repay the loan.

00:03:23.883 --> 00:03:27.123
A credit union's policy must
also establish limits on

00:03:27.123 --> 00:03:30.223
the number of modifications
permitted for an individual loan.

00:03:30.673 --> 00:03:34.473
If a credit union restructures an
individual loan more than once a year

00:03:34.493 --> 00:03:38.833
or twice in five years, examiners will
expect the documentation to reflect

00:03:38.833 --> 00:03:42.343
the borrower's continued willingness
and ability to repay the loan.

00:03:42.703 --> 00:03:45.993
The agency continues to encourage
credit unions to work with their

00:03:45.993 --> 00:03:50.163
members who are experiencing financial
difficulties due to the COVID 19

00:03:50.173 --> 00:03:52.633
pandemic using safe and sound approaches.

00:03:53.043 --> 00:03:56.683
Therefore, the agency will not object
to previous loan modifications,

00:03:56.733 --> 00:04:00.673
including interest capitalization,
prior to the effective date of this rule

00:04:00.673 --> 00:04:04.653
change, if such efforts are conducted
in a reasonable manner with proper

00:04:04.653 --> 00:04:06.473
controls and management oversight.

00:04:07.043 --> 00:04:11.343
Please contact your examiner, your
regional office, or your state supervisory

00:04:11.343 --> 00:04:12.983
authority if you have questions.

00:04:13.403 --> 00:04:16.513
Next, we provide the question
and answer portion of the letter.

00:04:16.923 --> 00:04:18.043
Question and answer.

00:04:18.473 --> 00:04:19.063
Question.

00:04:19.643 --> 00:04:23.073
What is required in a loan
modification policy that permits

00:04:23.073 --> 00:04:24.573
capitalization of interest?

00:04:24.853 --> 00:04:25.413
Answer.

00:04:25.893 --> 00:04:29.853
Prudent loan modification policies
and procedures help borrowers resume

00:04:29.853 --> 00:04:33.703
affordable, sustainable payments by
using an appropriate structure to

00:04:33.703 --> 00:04:37.623
meet the needs of the borrower while
minimizing losses to the credit union.

00:04:38.048 --> 00:04:42.118
Consistent with the final rule, the
policy should have explicit language

00:04:42.148 --> 00:04:45.448
prohibiting the authorization of
additional advances to finance

00:04:45.448 --> 00:04:47.128
credit union fees and commissions.

00:04:47.818 --> 00:04:51.408
Procedures will include providing
borrowers with written disclosures that

00:04:51.408 --> 00:04:55.218
are accurate, clear, and conspicuous
in accordance with federal and state

00:04:55.218 --> 00:04:57.658
consumer protection laws and regulations.

00:04:58.088 --> 00:05:01.598
Additionally, policy and procedures
will have standards for appropriate

00:05:01.598 --> 00:05:05.638
documentation that reflect a borrower's
ability to repay, a borrower's

00:05:05.638 --> 00:05:08.948
sources of repayment, and when
appropriate, compliance with the

00:05:08.948 --> 00:05:13.348
credit union's valuation policies at
the time the modification is approved.

00:05:14.943 --> 00:05:18.373
The updated regulation says if we
capitalize interest, we have to

00:05:18.373 --> 00:05:21.623
analyze whether the borrower has
the ability to repay the debt.

00:05:22.193 --> 00:05:24.323
It sounds like we need to
re underwrite the loan.

00:05:24.873 --> 00:05:28.073
How does the credit union determine
the ability to repay the debt?

00:05:28.443 --> 00:05:28.993
Answer.

00:05:29.483 --> 00:05:32.773
There is no change to the requirement
to document whether the borrower

00:05:32.773 --> 00:05:34.253
is able to repay the debt.

00:05:34.903 --> 00:05:39.083
The final rule does not prescribe a method
for making that determination, as it

00:05:39.083 --> 00:05:41.373
provides flexibility to the credit union.

00:05:41.873 --> 00:05:45.283
However, the credit union should
maintain documentation in the loan

00:05:45.283 --> 00:05:49.213
file reflecting how it made that
determination, including evidence

00:05:49.213 --> 00:05:50.903
of the borrower's source of income.

00:05:51.208 --> 00:05:54.768
We would expect this documentation
to follow loan guidelines such as

00:05:54.768 --> 00:05:59.178
debt to income ratio or debt service
coverage ratio, proof of income,

00:05:59.188 --> 00:06:02.758
budgets, and business projections,
among other items as needed.

00:06:03.178 --> 00:06:03.718
Question.

00:06:04.308 --> 00:06:08.548
What disclosures should a credit union
provide a borrower for a loan modification

00:06:08.558 --> 00:06:11.048
that includes capitalized unpaid interest?

00:06:11.328 --> 00:06:11.858
Answer.

00:06:12.368 --> 00:06:19.113
The final rule does not require the use
However, regulations X and Z may apply to

00:06:19.113 --> 00:06:23.903
some modifications, so a credit union must
comply with the applicable disclosure and

00:06:23.903 --> 00:06:26.093
notice requirements of those regulations.

00:06:26.703 --> 00:06:30.503
The terms of the modification will
dictate which, if any, disclosures or

00:06:30.503 --> 00:06:32.633
notices the credit union will provide.

00:06:33.233 --> 00:06:37.313
All disclosures and notices must be
accurate, clear, and conspicuous.

00:06:42.308 --> 00:06:42.858
Answer.

00:06:43.448 --> 00:06:46.768
The following approaches, among
others, may be acceptable.

00:06:47.058 --> 00:06:51.178
Capitalization of deferred interest
and adjusting monthly payments upward.

00:06:51.608 --> 00:06:56.228
Capitalization of deferred interest
and extending the loan term or Break

00:06:56.228 --> 00:07:00.488
out deferred interest into a separate
note, provided collateral is adequate

00:07:00.618 --> 00:07:02.668
or have an unsecured note as needed.

00:07:03.178 --> 00:07:06.538
The payments on the separate note may
be concurrent or could be deferred

00:07:06.548 --> 00:07:10.908
until a future date, either specified
or upon repayment of the primary note.

00:07:11.348 --> 00:07:15.128
When choosing a method, the federally
insured credit union should fully

00:07:15.128 --> 00:07:18.938
understand the implications for the
various choices including, but not

00:07:18.938 --> 00:07:23.578
limited to, consistency with safe and
sound credit underwriting standards,

00:07:23.958 --> 00:07:28.008
impacts on the timing of interest
recognition, impacts on collateral

00:07:28.018 --> 00:07:33.148
coverage, including when a secured loan
is extended beyond its original terms and

00:07:33.593 --> 00:07:38.343
Impacts on accrual status and potential
cross defaults when notes are bifurcated.

00:07:38.763 --> 00:07:40.533
This concludes the Enqueue a Letter.

00:07:40.963 --> 00:07:45.123
If your credit union could use assistance
with your exam, reach out to Mark Treichel

00:07:45.133 --> 00:07:47.563
on LinkedIn or at marktreichel dot com.

00:07:48.133 --> 00:07:50.783
This is Samantha Shares and
we thank you for listening.

00:07:51.206 --> 00:07:53.186
Hello, this is Samantha shares.

00:07:53.786 --> 00:07:57.246
This episode covers NCUA's
letter to credit unions.

00:07:57.256 --> 00:08:01.716
Number 23, CU07 titled
capitalization of unpaid interest.

00:08:02.106 --> 00:08:04.546
The following is an audio
version of that letter.

00:08:05.046 --> 00:08:08.086
This podcast is educational
and is not legal advice.

00:08:08.581 --> 00:08:12.591
We are sponsored by Credit Union
Exam Solutions, Inc., whose team has

00:08:12.591 --> 00:08:17.451
over 240 years of national credit
union administration experience.

00:08:17.861 --> 00:08:21.531
We assist our clients with NCUA
so they save time and money.

00:08:21.821 --> 00:08:25.761
If you are worried about a recent,
upcoming, or in process NCUA

00:08:25.761 --> 00:08:29.441
examination, reach out to learn how
they can assist at marktreichel.

00:08:29.471 --> 00:08:29.891
com.

00:08:30.351 --> 00:08:34.261
Also check out our other podcast called
With Flying Colors, where we provide

00:08:34.281 --> 00:08:37.261
tips on how to achieve success with NCUA.

00:08:37.681 --> 00:08:41.451
While this letter is three years
old, it is still active and relevant.

00:08:41.861 --> 00:08:42.831
And now the letter.

00:08:43.221 --> 00:08:45.361
Capitalization of unpaid interest.

00:08:45.781 --> 00:08:48.851
Dear Boards of Directors and
Chief Executive Officers.

00:08:49.291 --> 00:08:54.721
On June 24, 2021, the NCUA Board
unanimously voted to lift the prohibition

00:08:54.721 --> 00:08:58.071
of capitalization of interest in
connection with loan workouts and

00:08:58.071 --> 00:08:59.741
modifications from regulation.

00:09:00.261 --> 00:09:05.141
The rule became effective July 30,
2021 and applies to loan workouts and

00:09:05.151 --> 00:09:07.461
modifications on or after this date.

00:09:07.911 --> 00:09:11.471
The rule establishes documentation
requirements to help ensure that

00:09:11.471 --> 00:09:14.811
the addition of unpaid interest
to the principal balance of a loan

00:09:14.961 --> 00:09:17.871
does not hinder the borrower's
ability to repay the loan.

00:09:18.336 --> 00:09:22.176
For borrowers experiencing financial
hardship, a prudently underwritten

00:09:22.206 --> 00:09:25.826
and appropriately managed loan
modification consistent with safe and

00:09:25.826 --> 00:09:30.086
sound lending practices is generally
in the long term best interest of both

00:09:30.096 --> 00:09:31.786
the borrower and the credit union.

00:09:32.216 --> 00:09:36.306
Modification options include lowering
of loan payments or the interest rate,

00:09:36.486 --> 00:09:40.216
extending the maturity date, partial
principal or interest forgiveness,

00:09:40.276 --> 00:09:41.866
and capitalization of interest.

00:09:42.396 --> 00:09:46.436
Such modifications may allow a borrower
to repay the loan, which helps the

00:09:46.436 --> 00:09:50.456
borrower and the credit union avoid
the costs of default and foreclosure.

00:09:50.866 --> 00:09:54.446
The final rule continues to prohibit
credit unions from financing

00:09:54.446 --> 00:09:56.366
credit union fees and commissions.

00:09:56.846 --> 00:09:59.916
Credit unions will be permitted
to continue to make advances to

00:09:59.916 --> 00:10:03.596
cover third party fees to protect
loan collateral, such as force

00:10:03.596 --> 00:10:05.756
placed insurance or property taxes.

00:10:06.251 --> 00:10:09.881
Maintaining the prohibition on the
capitalization of credit union fees

00:10:10.051 --> 00:10:13.811
is an important consumer protection
feature of the rule for member borrowers.

00:10:14.431 --> 00:10:19.151
Consumer Protection Considerations The
final rule requires credit unions to

00:10:19.151 --> 00:10:23.501
adopt policies and procedures to ensure
that loan modifications are in the long

00:10:23.501 --> 00:10:25.371
term best interest of the borrowers.

00:10:25.821 --> 00:10:30.191
All documentation, including required
disclosures, must be accurate, clear and

00:10:30.191 --> 00:10:34.751
conspicuous and consistent with applicable
federal and state laws and regulations.

00:10:35.241 --> 00:10:39.361
Any adverse credit reporting must be
accurate and comply with the requirements

00:10:39.361 --> 00:10:43.111
of the Fair Credit Reporting Act
and, when applicable, state law.

00:10:43.556 --> 00:10:45.166
Credit risk considerations.

00:10:45.496 --> 00:10:48.986
This regulation applies to all
consumer and commercial loans.

00:10:49.466 --> 00:10:53.046
Credit unions should document why
capitalizing interest is the best

00:10:53.046 --> 00:10:56.236
course of action when determining
the terms of the modification.

00:10:56.686 --> 00:10:59.716
Further, the rule requires
the credit union's policy.

00:10:59.776 --> 00:11:03.051
Ensure that a credit union makes
loan workout decisions based on

00:11:03.051 --> 00:11:06.646
a borrower's renewed willingness
and ability to repay the loan.

00:11:07.086 --> 00:11:10.326
A credit union's policy must
also establish limits on

00:11:10.326 --> 00:11:13.426
the number of modifications
permitted for an individual loan.

00:11:13.876 --> 00:11:17.676
If a credit union restructures an
individual loan more than once a year

00:11:17.696 --> 00:11:22.036
or twice in five years, examiners will
expect the documentation to reflect

00:11:22.036 --> 00:11:25.546
the borrower's continued willingness
and ability to repay the loan.

00:11:25.906 --> 00:11:29.196
The agency continues to encourage
credit unions to work with their

00:11:29.196 --> 00:11:33.366
members who are experiencing financial
difficulties due to the COVID 19

00:11:33.376 --> 00:11:35.836
pandemic using safe and sound approaches.

00:11:36.246 --> 00:11:39.886
Therefore, the agency will not object
to previous loan modifications,

00:11:39.936 --> 00:11:43.876
including interest capitalization,
prior to the effective date of this rule

00:11:43.876 --> 00:11:47.856
change, if such efforts are conducted
in a reasonable manner with proper

00:11:47.856 --> 00:11:49.676
controls and management oversight.

00:11:50.246 --> 00:11:54.546
Please contact your examiner, your
regional office, or your state supervisory

00:11:54.546 --> 00:11:56.186
authority if you have questions.

00:11:56.606 --> 00:11:59.716
Next, we provide the question
and answer portion of the letter.

00:12:00.126 --> 00:12:01.246
Question and answer.

00:12:01.676 --> 00:12:02.266
Question.

00:12:02.846 --> 00:12:06.276
What is required in a loan
modification policy that permits

00:12:06.276 --> 00:12:07.776
capitalization of interest?

00:12:08.056 --> 00:12:08.616
Answer.

00:12:09.096 --> 00:12:13.056
Prudent loan modification policies
and procedures help borrowers resume

00:12:13.056 --> 00:12:16.906
affordable, sustainable payments by
using an appropriate structure to

00:12:16.906 --> 00:12:20.826
meet the needs of the borrower while
minimizing losses to the credit union.

00:12:21.251 --> 00:12:25.321
Consistent with the final rule, the
policy should have explicit language

00:12:25.351 --> 00:12:28.651
prohibiting the authorization of
additional advances to finance

00:12:28.651 --> 00:12:30.331
credit union fees and commissions.

00:12:31.021 --> 00:12:34.611
Procedures will include providing
borrowers with written disclosures that

00:12:34.611 --> 00:12:38.421
are accurate, clear, and conspicuous
in accordance with federal and state

00:12:38.421 --> 00:12:40.861
consumer protection laws and regulations.

00:12:41.291 --> 00:12:44.801
Additionally, policy and procedures
will have standards for appropriate

00:12:44.801 --> 00:12:48.841
documentation that reflect a borrower's
ability to repay, a borrower's

00:12:48.841 --> 00:12:52.151
sources of repayment, and when
appropriate, compliance with the

00:12:52.151 --> 00:12:56.551
credit union's valuation policies at
the time the modification is approved.

00:12:58.146 --> 00:13:01.576
The updated regulation says if we
capitalize interest, we have to

00:13:01.576 --> 00:13:04.826
analyze whether the borrower has
the ability to repay the debt.

00:13:05.396 --> 00:13:07.526
It sounds like we need to
re underwrite the loan.

00:13:08.076 --> 00:13:11.276
How does the credit union determine
the ability to repay the debt?

00:13:11.646 --> 00:13:12.196
Answer.

00:13:12.686 --> 00:13:15.976
There is no change to the requirement
to document whether the borrower

00:13:15.976 --> 00:13:17.456
is able to repay the debt.

00:13:18.106 --> 00:13:22.286
The final rule does not prescribe a method
for making that determination, as it

00:13:22.286 --> 00:13:24.576
provides flexibility to the credit union.

00:13:25.076 --> 00:13:28.486
However, the credit union should
maintain documentation in the loan

00:13:28.486 --> 00:13:32.416
file reflecting how it made that
determination, including evidence

00:13:32.416 --> 00:13:34.106
of the borrower's source of income.

00:13:34.411 --> 00:13:37.971
We would expect this documentation
to follow loan guidelines such as

00:13:37.971 --> 00:13:42.381
debt to income ratio or debt service
coverage ratio, proof of income,

00:13:42.391 --> 00:13:45.961
budgets, and business projections,
among other items as needed.

00:13:46.381 --> 00:13:46.921
Question.

00:13:47.511 --> 00:13:51.751
What disclosures should a credit union
provide a borrower for a loan modification

00:13:51.761 --> 00:13:54.251
that includes capitalized unpaid interest?

00:13:54.531 --> 00:13:55.061
Answer.

00:13:55.571 --> 00:14:02.316
The final rule does not require the use
However, regulations X and Z may apply to

00:14:02.316 --> 00:14:07.106
some modifications, so a credit union must
comply with the applicable disclosure and

00:14:07.106 --> 00:14:09.296
notice requirements of those regulations.

00:14:09.906 --> 00:14:13.706
The terms of the modification will
dictate which, if any, disclosures or

00:14:13.706 --> 00:14:15.836
notices the credit union will provide.

00:14:16.436 --> 00:14:20.516
All disclosures and notices must be
accurate, clear, and conspicuous.

00:14:25.511 --> 00:14:26.061
Answer.

00:14:26.651 --> 00:14:29.971
The following approaches, among
others, may be acceptable.

00:14:30.261 --> 00:14:34.381
Capitalization of deferred interest
and adjusting monthly payments upward.

00:14:34.811 --> 00:14:39.431
Capitalization of deferred interest
and extending the loan term or Break

00:14:39.431 --> 00:14:43.691
out deferred interest into a separate
note, provided collateral is adequate

00:14:43.821 --> 00:14:45.871
or have an unsecured note as needed.

00:14:46.381 --> 00:14:49.741
The payments on the separate note may
be concurrent or could be deferred

00:14:49.751 --> 00:14:54.111
until a future date, either specified
or upon repayment of the primary note.

00:14:54.551 --> 00:14:58.331
When choosing a method, the federally
insured credit union should fully

00:14:58.331 --> 00:15:02.141
understand the implications for the
various choices including, but not

00:15:02.141 --> 00:15:06.781
limited to, consistency with safe and
sound credit underwriting standards,

00:15:07.161 --> 00:15:11.211
impacts on the timing of interest
recognition, impacts on collateral

00:15:11.221 --> 00:15:16.351
coverage, including when a secured loan
is extended beyond its original terms and

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Impacts on accrual status and potential
cross defaults when notes are bifurcated.

00:15:21.966 --> 00:15:23.736
This concludes the Enqueue a Letter.

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If your credit union could use assistance
with your exam, reach out to Mark Treichel

00:15:28.336 --> 00:15:30.766
on LinkedIn or at marktreichel dot com.

00:15:31.336 --> 00:15:33.986
This is Samantha Shares and
we thank you for listening.