During its November 19th board meeting the NCUA issued a proposed rule that would allow credit unions to include unpaid interest in loan workouts and modifications. The proposal includes commercial and business loans. The proposed rule would amend Appendix B to Part 741 – Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans.
The Board has determined that the current prohibition on authorizing additional advances to finance unpaid interest may be overly burdensome and, in some cases, hamper a federally insured credit union’s (FICU’s) good-faith efforts to engage in loan workouts with borrowers facing difficulty because of the economic disruption that the COVID-19 pandemic has caused. Advancing interest may avert the need for alternative actions that would be more harmful to borrowers. The proposed rule would establish documentation requirements to help ensure that the addition of unpaid interest to the principal balance of a mortgage loan does not hinder the borrower’s ability to become current on the loan. The proposed change would apply to workouts of all types of member loans, including commercial and business loans.
The proposed rule states:
At a minimum, if a FICU’s loan modification policy permits capitalization of unpaid interest, the policy must require each of the following:
1. Compliance with all applicable consumer protection laws and regulations, including, but not limited to, the Equal Credit Opportunity Act, the Fair Housing Act, the Truth In Lending
Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, and the prohibitions against the use of unfair, deceptive or abusive acts or practices contained in the
Consumer Financial Protection Act of 2010. (The Board notes that FICUs are also expected to comply with applicable State consumer protection laws that, in some instances, may be more
stringent than Federal law, prohibiting, for example, the charging of interest on interest.)
2. Documentation that reflects a borrower’s ability to repay, a borrower’s source(s) of repayment, and when appropriate, compliance with the FICU’s valuation policies at the time the
modification is approved.
3. Providing borrowers with documentation that is accurate, clear, and conspicuous and consistent with Federal and state consumer protection laws.
4. Appropriate reporting of loan status for modified loans in accordance with applicable law and accounting practices. The FICU shall not report a modified loan as past due if the loan was current prior to modification and the borrower is complying with the terms of the modification.
5. Prudent policies and procedures to help borrowers resume affordable and sustainable repayments that are appropriately structured, while at the same time minimizing losses to the credit union.
The prudent policies and procedures must consider:
i. Whether the loan modifications are well-designed, consistently applied, and provide a favorable outcome for borrowers.
ii. The available options for borrowers to repay any missed payments at the end of their modifications to avoid delinquencies or other adverse consequences.
6. Appropriate safety and soundness safeguards to prevent the following:
i. Masking deteriorations in loan portfolio quality and understating charge-off levels;
ii. Delaying loss recognition resulting in an understated allowance for loan and lease losses account or inaccurate loan valuations;
iii. Overstating net income and net worth (regulatory capital) levels; and
iv. Circumventing internal controls.
The NCUA is asking for comments on any aspect of the proposed rule and input on the following questions:
1. What was your experience or level of use with interest capitalization before the agency prohibited the practice in 2012 pursuant to Appendix B?
2. How likely are you to incorporate interest capitalization as a mortgage modification tool if permitted by the agency?
3. What risks do you foresee, if any, to either the credit union or the borrower in a mortgage modification that includes capitalization of interest?
4. When credit unions originate certain loans, they often do so with the intent of selling to the secondary market. The GSEs are frequent investors in credit union originated loans. Subsequent to sale, if a member with a loan sold by a credit union begins experiencing financial difficulty and needs assistance in the form of a modification, capitalization of interest is permitted within a loan workout by the GSE who now holds the loan. However, Fannie Mae does not permit interest capitalization prior to sale and Freddie Mac does so only under certain conditions. How would this limitation on capitalizing interest prior to sale to a GSE impact your willingness or ability to offer interest capitalization on a loan?
5. In light of the fact that adding unpaid interest to the principal balance of a mortgage loan could potentially be detrimental to a member’s ability to become current on the loan, the NCUA is proposing to add a number of consumer protection guardrails to Appendix B. We invite comments on these guardrails. In addition, what other documentation, disclosure, or other consumer protection features, if any, should the NCUA require before permitting capitalization of interest as a loan modification tool? Are the consumer protections that apply to other types of loan modification sufficient to protect borrowers who receive interest capitalization or should the agency consider any other protections to counter any risks caused specifically by interest capitalization?
6. The proposed rule continues to provide that a credit union may, in no event, authorize additional advances to finance credit union fees and commissions. Should the Board authorize the capitalization of such fees and commissions at the final rule stage? Why or why not? Depending on the information obtained through the rulemaking, the Board may consider making this change in the final rule.
Comments will be accepted for 60 days after publication in the Federal Register (TBD).
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