Proposal would remove ban on capitalization of interest

(Nov. 20, 2020) Prohibiting the authorization of additional advances to finance unpaid interest may be overly burdensome, the NCUA Board has reasoned, and it wants to remove that ban with a proposed rule it issued unanimously Thursday.

The proposal, staff told the board, emerged from the financial impact of the coronavirus crisis as members struggled to stay current on their mortgage and other loans.

Removing the prohibition on the capitalization of interest in connection with loan workouts and modifications, the board said in its proposal, would “assist a federally insured credit union’s good-faith efforts to engage in loan workouts with borrowers facing difficulty because of the economic disruption that the COVID- 19 event has caused.”

The proposal suggests that 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 board said in the proposal. “The proposed change would apply to workouts of all types of member loans, including commercial and business loans.”

The proposed rule was issued for a 60-day comment period.

Proposed Rule, Part 741, Appendix B, Capitalization of Interest