Letter outlines limits on capitalizing loans

(Aug. 6, 2021) The financing of fees and commissions continue to be prohibited for federally insured credit unions, despite adoption of a new rule earlier this year allowing capitalization of loan interest, NCUA said in a letter issued Thursday.

In Letter to Credit Unions 21-CU-07, the agency said that maintaining the prohibition on capitalization of fees “is an important consumer protection feature of the rule for member borrowers.”

In June, the agency’s board voted unanimously to lift the prohibition of capitalization of interest in connection with loan workouts and modifications; the rule took effect late last week (July 30). The change was made, NCUA said, to give borrowers additional access to loan workouts, perhaps caused by the economic disruption caused by the coronavirus crisis.

The rule also sets 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.

Although the final rule prohibits capitalizing loan fees and commissions, the letter notes it does continue to allow advances to cover third-party fees to protect loan collateral, such as for force-placed insurance or property taxes.

The letter also suggests that “a prudently underwritten and appropriately managed loan modification, consistent with safe and sound lending practices” is the best approach for helping borrowers.

Other key points of the letter include:

  • All documentation for loan capitalizations, including required disclosures, must be accurate, clear and conspicuous, “and consistent with applicable federal and state laws and regulations.” The agency said any adverse credit reporting must be accurate and comply with the requirements of the Fair Credit Reporting Act, and, when applicable, state law.
  • Credit unions should document why capitalizing interest is the best course of action when determining the terms of the modification. “Further, the rule requires the credit union’s policy ensure that a credit union makes loan workout decisions based on a borrower’s renewed willingness and ability to repay the loan,” the letter states.
  • A credit union’s policy must also establish limits on the number of modifications permitted for an individual loan. “If a credit union restructures an individual loan more than once a year or twice in five years, examiners will expect the documentation to reflect the borrower’s continued willingness and ability to repay the loan,” the letter states.

NASCUS wrote in its comment letter on the proposal earlier this year, that it had the capacity to provide credit unions with 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.


NCUA Letter to Credit Unions 21-CU-07: Capitalization of Unpaid Interest