Capitalization of Interest Rule to Assist Financially Distressed Borrowers

June 2021
Capitalization of Interest Rule to Assist Financially Distressed Borrowers

Board Action Bulletin

NCUA Board Approves CECL Phase-in Final Rule

ALEXANDRIA, Va. (June 24, 2021) – Through a live audio webcast, the National Credit Union Administration Board held its sixth open meeting of 2021 and unanimously approved three items:

  • A final rule that removes the prohibition on the capitalization of interest in connection with loan workouts and modifications.
  • A final rule that would phase-in the day-one adverse effects on regulatory capital that may result from the adoption of the current expected credit losses accounting methodology over a three-year period.
  • An extension of the federal credit union loan interest rate ceiling until March 10, 2023.

Capitalization of Interest Final Rule to Aid Members in the Coming Months

The Board approved a final rule that removes the prohibition on the capitalization of interest in connection with loan workouts and modifications. This follows a 60-day public comment period that closed on February 2, 2021. Capitalization of Interest is the addition of accrued but unpaid interest to the principal balance of a loan.

“This rule is another targeted measure by the NCUA Board aimed at helping credit unions and their members navigate the COVID-19 pandemic’s economic environment,” said NCUA Chairman Todd M. Harper. “The final rule will also give credit unions parity with banks, Fannie Mae, Freddie Mac, and the Federal Housing Administration, all of which already allow servicers to capitalize interest as part of a prudent modification program.”

The Board is finalizing the rule largely as proposed during its November 2020 meeting. The rule removes the prohibition on credit unions from capitalizing interest on loan modifications while maintaining the important prohibition on a credit union capitalizing credit union fees and commissions. It also establishes consumer financial protection guardrails like ability to repay requirements to ensure that the addition of unpaid interest to the principal balance of a mortgage loan will not hinder the borrower’s ability to make payments or become current on the loan. These measures would apply to workouts of all types of member loans, including commercial and business loans.

The final rule becomes effective 30 days following publication in the Federal Register.

Final Rule Will Phase-in CECL’s Adverse Effects

The Board approved a final rule that would phase-in the day-one adverse effects on regulatory capital that may result from fully implementing the current expected credit losses (CECL) accounting methodology. This rule is consistent with regulations previously issued by the federal banking agencies.

“This phase-in will provide credit unions time to adjust to the change and grow capital organically without disrupting their ability to serve their members,” said Chairman Harper. “Additionally, this change will provide credit unions with a measure of regulatory relief while still requiring them to account for the methodology for other purposes, such as in the Call Reports they file with the NCUA.”

The NCUA Board is finalizing the rule largely as proposed during its July 2020 meeting. Under the final rule, the day-one effects of CECL on a federally insured credit union’s net worth ratio would be phased-in over a three-year period, under the NCUA’s prompt corrective action regulations. The phase-in would only be applied to those federally insured credit unions that adopt CECL for the fiscal years beginning on or after December 15, 2022, which is the deadline established by the Financial Accounting Standards Board for CECL’s implementation. Credit unions that decide to adopt CECL for the fiscal years beginning before that date would not be eligible for the phase-in.

In addition, consistent with the Federal Credit Union Act, federal credit unions with less than $10 million in assets would no longer be required to determine their charges for loan losses under Generally Accepted Accounting Principles (GAAP). Instead, these credit unions can use any reasonable reserve methodology if it adequately covers known and probable loan losses. The final rule also clarifies that state-chartered FICUs with less than $10 million in assets and that are required by state law to comply with GAAP are eligible for the transition phase-in.

The final rule becomes effective upon publication in the Federal Register.

Board Extends Current 18 Percent Interest Rate Ceiling

After reviewing recent trends in money-market rates and financial conditions among federal credit unions, the Board approved maintaining the current temporary 18-percent interest rate ceiling, for loans made by federal credit unions, for a new eighteen-month period from September 11, 2021, through March 10, 2023.

The Federal Credit Union Act caps the interest rate on federal credit union loans at 15 percent; however, the NCUA Board has the discretion to raise that limit for 18-month periods if interest-rate levels could threaten safety and soundness. The 18-percent cap applies to all federal credit union lending except originations made under NCUA’s payday alternative loan program, which are capped at 28 percent currently.

An NCUA staff analysis concluded that money market rates have risen over the preceding six-month period and that lowering the rate ceiling below the current 18-percent maximum would threaten the safety and soundness of individual credit unions due to anticipated adverse effects on liquidity, capital, earnings, and growth. The Federal Credit Union Act requires both those conditions exist for the Board to allow the interest rate ceiling to be higher than 15 percent.

The analysis also found that a decrease in the loan rate cap would likely result in a reduction in payday alternative lending, a reduction in federal credit union earnings, and some members turning to payday lenders to meet short-term borrowing needs.

“Going forward, I encourage all credit unions to offer their members lower rates whenever possible and to develop affordable loan products that include a savings feature,” Chairman Harper said. “Providing members with an easy way to save for a rainy day will help them weather small emergencies that might otherwise cause them to go to a payday lender.”

The NCUA Board will continue to monitor market rates and credit union financial conditions to determine whether a change should be made to the maximum loan rate. The Board could act sooner than 18 months if circumstances warrant.

The NCUA tweets all open Board meetings live. Follow @TheNCUA on Twitter, and access Board Action Memorandums and NCUA rule changes at www.ncua.gov. The NCUA also live streams, archives and posts videos of open Board meetings online.

Last modified on
06/24/21