NASCUS-supported rules finalized on interest capitalization, CECL impact

(June 25, 2021) Final rules on capitalization of interest by federally insured credit unions, and on mitigating the day-one effect of the current expected credit loss (CECL) accounting standard on capital levels at credit unions, were approved – both unanimously – by the NCUA Board at its Thursday meeting.

Both rules are supported by NASCUS.

The interest capitalization rule is slated to take effect 30 days after publication in the Federal Register; however, NCUA staff indicated that credit unions could begin using its provisions now. The CECL rule takes effect immediately.

The interest capitalization rule removes the prohibition on capitalizing interest in connection with loan workouts and modifications. Adopted as proposed (without change), the agency said the final rule establishes 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 final rule makes several technical changes to the regulations to improve their clarity and update certain references

NCUA Office of Examination and Insurance Director Myra Toeppe indicated that, although the official effective date of the rule is 30 days after publication, credit unions are encouraged to use its provisions as soon as possible without facing enhanced scrutiny from examiners.

NASCUS had urged NCUA, when filing its comment letter in February, to act expeditiously in finalizing the rule, arguing that doing so would give credit unions greater flexibility to work with economically distressed members and provides “consumer protection guardrails that protect against the unlikely chance that a credit union engages in unfair lending practices.”

Regarding state laws on interest capitalization, NCUA’s final rule notes that the agency is not inclined to provide a blanket preemption of any or all state laws that may relate to capitalization of interest. “FCUs may need to evaluate the application of relevant state laws on a case-by-case basis and may contact the NCUA for its opinion in the event a particular state law raises a preemption issue,” the agency wrote.

On the rule dealing with the impact of the CECL accounting standard (which takes effect for most credit unions in January 2023), a phase-in period of three years is established for adverse effects on credit unions’ regulatory capital. Credit unions with less than $10 million in assets would be exempted from using the standard to figure loan loss reserves.

The final rule has two changes from the proposal, as advanced by NASCUS. First, the rule makes a technical change (for clarity) removing references to specific calendar dates in the transition period for the phase in. The rule now consistently refers to fiscal years.

The second change clarifies that state-chartered FICUs with less than $10 million in assets and that are required by state law to comply with generally accepted accounting practices (GAAP) are eligible for the transition phase-in.

NASCUS, in its comments last year, supported the rule and NCUA’s efforts to mitigate the impact of the accounting standard. However, NASCUS also noted that the accounting standard remains of concern. “NASCUS, many state credit union regulators, and many state credit union system stakeholders remain concerned that the CECL methodology will be counter-productive when implemented for the credit union system,” NASCUS wrote.

Final Rule, Part 741, Appendix B, Capitalization of Interest.

Final Rule, Part 702, Current Expected Credit Loss Methodology