In its sixth open meeting for 2021, the National Credit Union Administration (NCUA) approved a final rule removing the prohibition on the capitalization of interest in connection with loan workouts and modifications.
Capitalization of interest is the addition of accrued but unpaid interest to the principal balance of a loan. The rule follows a 60-day public comment period that closed earlier this year.
“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,” NCUA Chairman Todd Harper said in a release. “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 rule, largely similar to what was proposed at the agency’s November 2020 meeting, 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 commission.
Consumer financial protection guardrails like ability to repay requirements to ensure 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 were also established by the new rule. These measures would apply to workouts of all types of member loans, including commercial and business loans.
National Association of Federally-Insured Credit Unions President and CEO Dan Berger approved of the rule.
“The NAFCU team worked hard to advocate for this rule as it will provide credit unions with flexibility and their members with a safe, sound solution with strong consumer protections that will help them manage their loan payments amid the COVID-19 economic recovery,” Berger said. “We thank the NCUA board for listening to our feedback and instituting this rule.
The rule will become effective 30 days after publication in the Federal Register.