Rules on interest capitalization, CECL on NCUA Board agenda

(June 18, 2021) Two final rules – on mitigating the impact of the new CECL accounting standard, and allowing credit unions to capitalize interest, which NASCUS urged be finalized “expeditiously” earlier this year – are on the agenda for the NCUA Board when it meets next week.

The proposal on capitalizing interest was issued in November by the NCUA Board and would remove a prohibition on interest capitalization. Then, the board suggested, that continuing to prohibit the authorization of additional advances to finance unpaid interest may be overly burdensome. Removing the prohibition, the board asserted, 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.”

In its comment letter filed in February, NASCUS agreed, writing that finalizing the proposal would provide credit unions’ greater flexibility to work with economically distressed members (including those affected by the coronavirus crisis). “That enhanced flexibility benefits distressed credit union borrowers by expanding the options for repayment programs as the member regains their economic footing,” NASCUS wrote.

The state system also urged the board to act expeditiously in finalizing the proposal. “We have no doubt credit unions will exercise the ability to capitalize interest to the benefit of members in need and are confident in the ability of state examiners to provide supervisory oversight of loan workouts and modifications,” NASCUS wrote.

Also on the board’s agenda for next week’s meeting: finalizing a rule mitigating the day-one effect of the current expected credit loss (CECL) accounting standard on capital levels at credit unions. The new standard takes effect for most credit unions in January 2023.

Under the proposal, a phase-in period of three years would be established for the day-one adverse effects on credit unions’ regulatory capital under the CECL accounting standard. However, smaller credit unions (those with $10 million or less in assets) would be exempted from having to use the standard to figure loan loss reserves.

NASCUS, in its comment letter filed last October, supported the proposal, but also offered some suggested changes, including that credit unions that reach $10 million in assets after Jan. 1, 2023 should be afforded the opportunity of a three-year phase in of the day-one effect. Credit unions larger than that, NASCUS wrote, should have the option of recognizing the full day-one effect of CECL immediately. NASCUS also urged NCUA to consider how CECL will be incorporated into stress-testing requirements after implementation.

The meeting is set for 10 a.m. on Thursday; audio of the session will be streamed live, via the Internet.


NCUA Board Agenda for the June 24, 2021 Meeting

NASCUS comment: Proposed Rule — Capitalization of Interest in Connection with Loan Workouts and Modifications

NASCUS Comments on Transition to the Current Expected Credit Loss Methodology