Capitalization of Unpaid Interest

Letter to Credit Unions 21-CU-07 Capitalization of Unpaid Interest
August 2021

Effective July 30, 2021, NCUA has lifted the prohibition on federally insured credit unions (FICUs) capitalization of interest in connection with loan workouts and modifications from part 741, Appendix B. Modification options include lowering of loan payments or the interest rate, extending the maturity date, partial principal or interest forgiveness, and capitalization of interest. Such modifications may allow a borrower to repay the loan, which helps the borrower and the credit union avoid the costs of default and foreclosure. NCUA also provides a link to FAQs on Capitalization of Unpaid Interest.

The new final rule continues to prohibit credit unions from financing credit union fees and commissions, however they will be permitted to continue to make advances to cover third-party fees to protect loan collateral, such as force-placed insurance or property taxes.

Consumer Protection

To help ensure loan modifications aren’t detrimental to members, the final rule requires credit unions to adopt policies and procedures to ensure that loan modifications are in the long-term best interest of the borrowers. Furthermore:

  • All documentation, including required disclosures, must be accurate, clear and conspicuous, and consistent with applicable federal and state laws and regulations.
  • Any adverse credit reporting must be accurate and comply with FCRA requirements and applicable state law.
  • Credit unions must comply with § 4021 of the CARES Act which requires pandemic related loan modifications be reported as “current” (or as the status reported before the modification).

Credit Risk Considerations

The final rule includes credit risk safeguards. When determining the terms of a modification, credit unions should document why capitalizing interest is the best course of action. The rule also requires the credit union’s policy:

  • Ensure that loan workout decisions are based on a borrower’s renewed willingness and ability to repay.
  • 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 5 years, examiners will expect the documentation reflecting borrower’s continued willingness and ability to repay the loan.

 

21-RA-08 CFPB Amends Mortgage Servicing Requirements for Borrowers Affected by the COVID-19 Emergency
July 2021

NCUA issued Regulatory Alert to discuss the CFPB’s final rule temporarily amending certain mortgage servicing requirements under Regulation X to provide borrowers affected by COVID-19 economic dislocation enhanced foreclosure protections. The final rule only applies to servicers that service mortgages secured by a borrower’s principal residence (and does not apply to small servicers, defined by Reg Z § 1026.41(e)(4) as a servicer that, together with any affiliates, services 5,000 or fewer mortgage loans for which the servicer or an affiliate is the creditor or assignee.

The rule is effective August 31, 2021, however CFPB notes that servicers are free to implement the rule early. Among the enhanced protections offered by the final rule are the following:

  • Amends § 1024.31 to Define COVID-19 Related Hardship – Defines COVID-19 related hardship to mean “a financial hardship due, directly or indirectly, to the national emergency for the COVID-19 pandemic declared in Proclamation 9994 on March 13, 2020 (beginning on March 1, 2020) and continued on February 24, 2021…”
  • Modifies § 1024.39 Early Intervention Requirements – Temporarily modifies early intervention live-contact messages and reasonable diligence obligations to help ensure that borrowers experiencing a COVID-19 related hardship have timely and accurate information about loss mitigation options.
  • Amends § 1024.41 to Permit Modifications Based on Incomplete Application – The final rule authorizes servicers to offer loan modifications to borrowers experiencing a COVID-19 related hardship based on an evaluation of an incomplete application if specified criteria are met.
  • Establishes Temporary COVID-19 Loss Mitigation Procedural Safeguards in § 1024.41 – To ensure that a borrower has a meaningful opportunity to pursue loss mitigation options, from August 31, 2021 – December 31, 2021, unless an exception applies, a servicer must meet at least one of the safeguards specified in the rule before initiating any judicial or non-judicial foreclosure process where a borrower became more than 120 days delinquent on or after March 1, 2020, and the applicable state statute of limitations regarding foreclosures expires on or after January 1, 2022.

NASCUS note: For a more detailed review of the final rule than the Regulatory Alert, see this excellent analysis by Ballard Spahr LLP.

Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X
April 2021

 

CFPB Summary re: Protections for Borrowers Affected by the COVID-19 Emergency Under RESPA/Regulation X

12 CFR Part 1024

The Consumer Financial Protection Bureau (CFPB) is issuing this final rule to amend Regulation X to assist mortgage borrowers affected by the COVID-19 emergency.  The final rule establishes temporary procedural safeguards to help ensure that borrowers have a meaningful opportunity to be reviewed for loss mitigation before the servicer can make the first notice or filing required for foreclosure on certain mortgages.  In addition, the final rule would temporarily permit mortgage servicers to offer certain loan modifications made available to borrowers experiencing a COVID-19 related hardship based on the evaluation of an incomplete application.  The Bureau is also finalizing certain temporary amendments to the early intervention and reasonable diligence obligations that Regulation X imposes on mortgage servicers.

The final rule becomes effective on August 31, 2021.  The final rule can be accessed here.

A number of federal and state protections have been established through out the pandemic to provide protections to struggling borrowers.  Those protections are slated to phase out over the summer and the Bureau is concerned there will be historically high numbers of borrowers seeking assistance from servicers, which could lead to delays and errors as servicers work to process a high volume of loss mitigation inquiries and applications.

The final rules include five key amendments to Regulation X, all of which encourage borrowers and servicers to work together to facilitate review for foreclosure avoidance options.

  • The final rule establishes temporary special COVID-19 procedural safeguards that must be met for certain mortgages before the servicer can make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process because of a delinquency. This requirement generally is applicable only if (i) the borrower’s mortgage loan obligation becomes more than 120 days delinquent on or after March 1, 2020, and (ii) the statute of limitations applicable to the foreclosure action being taken in the laws of the State or municipality where the property securing the mortgage loan is located expires on or after January 1, 2022.
  • The final rule permits servicers to offer certain streamlined loan modification options made available to borrowers with COVID-19 related hardships based on the evaluation of an incomplete loss mitigation application. Eligible loan modifications must satisfy certain criteria that aim to establish sufficient safeguards to help ensure that a borrower is not harmed if the borrower chooses to accept an offer of an eligible loan modification based on the evaluation of an incomplete application.
  • To be eligible, the loan modification may not cause the borrower’s monthly required principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date the loan modification is effective.
  • If the loan modification permits the borrower to delay paying certain amounts until the mortgage loan is refinanced, the mortgaged property is sold, the loan modification matures, or for a mortgage loan insured by the FHA, the mortgage insurance terminates, those amounts must not accrue interest
  • The loan modification must be made available to borrowers experiencing a COVID-19 related hardship.
  • The borrower’s acceptance of an offer of the loan modification must end any preexisting delinquency on the mortgage loan or the loan modification must be designed to end any preexisting delinquency on the mortgage loan upon the borrower satisfying the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification.
  • The servicer may not charge any fee in connection with the loan modification and must waive all existing late charges, penalties, stop payment fees, or similar charges that were incurred on or after March 1, 2020, promptly upon the borrower’s acceptance of the loan modification. If the borrower accepts an offer made pursuant to this new exception, the final rule excludes servicers from certain requirements with regard to any loss mitigation application submitted prior to the loan modification offer.
  • However, if the borrower fails to perform under a trial loan modification plan offered pursuant to the proposed new exception or requests further assistance, the final rule requires servicers to immediately resume reasonable diligence with regard to any loss mitigation application the borrower submitted prior to the servicer’s offer of the trial loan modification plan and to provide the borrower with the acknowledgement notice required by Section 1024.41(b)(2).
  • The final rule amends the early intervention obligations to help ensure that servicers communicate timely and accurate information to borrowers about their loss mitigation options during the current crisis. In general, the final rule requires servicers to discuss specific additional COVID-19 related information during live contact with borrowers under existing Section 1024.39(a) in two circumstances: (i) if the borrower is not in a forbearance program and (ii) if the borrower is near the end of a forbearance program made available to borrowers experiencing a COVID-19 related hardship.  Unless the borrower states they are not interested, the servicer must also list and briefly describe to the borrower forbearance programs made available at that time and the actions the borrower must take to be evaluated.
  • The final rule clarifies servicers reasonable diligence obligations when the borrower is in a short-term payment forbearance program made available to a borrower experiencing a COVID-19 related hardship based on the evaluation of an incomplete application. Specifically, the final rule specifies that a servicer must contact the borrower no later than 30 days before the end of the forbearance period if the borrower remains delinquent to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation.  If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.

 July 26, 2021

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Re: NASCUS Comments on Policy for Setting the Normal Operating Level

Dear Secretary Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits this letter in response to the National Credit Union Administration’s (NCUA) request for comments on the Policy for Setting the Normal Operating Level (NOL) of the National Credit Union Share Insurance Fund (NCUSIF or SIF).[2] NCUA seeks comments on both the modeling methodology utilized to inform the NCUA Board’s determination of the NOL as well as the policy for notice and public comment on changes to the NOL. As discussed below, NASCUS supports a counter-cyclical approach to funding the NCUSIF based on annual modeling utilizing scenarios developed by the Federal Reserve. Furthermore, given the cost of maintaining the NCUSIF’s equity ratio at the NOL as determined by the NCUA Board is borne by credit union stakeholders, we believe the policy of notice and public comment before any change of 1 basis point or greater in the NOL should be maintained.

When NCUA promulgated the current policy in 2017, the agency received 663 comment letters providing feedback and recommendations.[3] It is unsurprising that NCUA received so many comments. For many credit unions, the NCUSIF deposit and obligation to maintain the SIF’s equity ratio at the NOL is one of the largest risk exposures (or opportunity costs) they face.

As our comments in response to the 2017 proposal to close the Temporary Corporate Credit Union Stabilization Fund reflect, NASCUS appreciates that for credit union stakeholders, the SIF is comprised of credit union money: monies that could be deployed to benefit members.[4] NASCUS also fully appreciates that NCUA, as administrator of the NCUSIF, has a duty to ensure the SIF is sufficiently capitalized to cover losses in the system when credit unions fail and must answer for any shortfalls.

Any discussion of the appropriate NOL at which to maintain the NCUSIF and the policy for making that determination is incomplete without acknowledging that the actual equity ratio of the SIF is inextricably tied to NCUA’s budget and the Overhead Transfer Rate (OTR). The simple fact is that NCUA has withdrawn over $1.7 billion from the SIF in the past decade ($1 billion of that in just the past 5 years) to fund agency operations.[5] Without question, the NCUSIF should fund its own administration and a robust supervisory program that identifies and mitigates material risk in the federally insured credit union system. But the fact remains that an elevated NOL, combined with the OTR, cannibalizes SIF investment earnings and denies credit unions SIF distribution opportunities.[6]

Viewed in this context, stakeholder apprehension about an elevated NOL is understandable. Should NCUA determine that an elevated NOL is absolutely necessary, the agency should take steps to reduce the OTR, restoring millions of dollars toward maintaining the NOL and increasing the potential for distributions to stakeholders.

Public Comment

As previously noted, the setting of the NOL directly affects the potential of returning funds to stakeholders. For that reason, we believe it is sound public policy to provide stakeholders the opportunity to participate in considerations of even modest 1 basis point adjustments to the NOL, as well as on the OTR and other adjustments or changes to the NCUSIF.

Modeling

Historically, the NCUSIF has performed well under its traditional modeling and operating levels. NASCUS supports use of a moderate recession as the model for the performance of the SIF. We also support use of the Federal Reserve baseline and adverse (when available) scenarios to test the model. NASCUS encourages NCUA to factor into its modeling the historical performance of the NCUSIF and the credit union system to better calibrate the true needs of the SIF while returning as much money to credit unions as prudent for deployment in service of members.

With respect to the length of the modeling period, NASCUS would support a 3-5 year period. In 2017, NCUA adopted a 5-year period in large part because of the calculations of the

National Bureau of Economic Research and to align with the corporate credit union resolution plan.[7] Given the maturation of the NCUA Guaranteed Notes (NGNs), there is no longer a compelling reason to aligning the modeling period to that program. While aligning with the National Bureau of Economic Research remains a compelling benchmark, aligning to the 3-year period utilized by the Federal Reserve in developing its baseline and adverse scenarios is also a compelling benchmark for NOL modeling. We encourage NCUA consider aligning with the Federal Reserve timeline.

Next to setting the OTR, establishing the NOL is one of the most consequential policy determinations administered by the NCUA. Over the past several years, NCUA has taken steps to bring more transparency to the OTR and NCUSIF. NASCUS applauds and supports those efforts. We encourage NCUA to continue enhancing the transparency related to the accounting of the NCUSIF, the OTR, and modeling and factors contributing to the determination of the NOL.

NASCUS commends NCUA for seeking stakeholder input and for carefully considering our perspectives and recommendations. We are happy to discuss our comments further at your convenience.

Sincerely,

Brian Knight
Executive Vice President & General Counsel

[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold over half of the $1.97 trillion assets in the credit union system and are proud to represent nearly half of the 126 million credit union members.

[2] “Policy for Setting the Normal Operating Level” 86 Fed. Reg. 28155 (May 25, 2021).

[3] “Closing the Temporary Corporate Credit Union Stabilization Fund and Setting the Share Insurance Fund Normal Operating Level” 82 Fed, Reg. 46298 (October 4, 2017).

[4] See https://www.nascus.org/wp-content/uploads/2019/06/08.31.17-TCCUSF-1.pdf

[5] Audited Financial Statements of NCUA Operating Fund, FY2000 – FY2020.

[6] 12 U.S.C. §1782(c)(3).

[7] 82 Fed, Reg. 46307 (October 4, 2017).

 

Letter to Credit Unions 21-CU-06 NCUA to Implement Phase One of Resuming Onsite Operations

July 2021— NCUA has announced that it is prepared to move into its first phase of resuming onsite operations (Phase 1) in some areas of the country. As part of Phase 1, NCUA examiners will be permitted to volunteer to work onsite at credit unions beginning July 19, 2021. Phase I parameters include:

  • Examiners may only volunteer to work onsite in locations where public health data indicates pandemic conditions have sufficiently moderated.
  • Examiners volunteering to work on-site will generally be expected to follow credit union policies related to safety and security.
  • NCUA will try to respect a credit union’s preference to not have examination staff onsite subject to supervisory necessities.

NCUA will continue to monitor the course of the pandemic and is prepared to adjust its plans as necessary.

Introduction:
The following is a Compendium of Part 741 of the Code of Federal Regulations (“CFR”). Part
741 governs Federally-Insured State-Chartered Credit Unions (“FISCUs”). Part 741 is divided
into two subparts. Subpart A contains regulations that apply directly to FISCUs and are not
codified elsewhere in the U.S. Code (“U.S.C.”) or CFR. While the regulations of Subpart A are
not fully codified elsewhere, they regularly reference other provisions of the U.S.C. and CFR.
Subpart B incorporates by reference complete provisions of the U.S.C. and CFR and applies
them to FISCUs.

Some provisions of Part 741 refer to sections of the U.S.C. or CFR that discuss activities that
may not be permitted under the law of the state in which the FISCU is chartered. Please note that
Part 741 does not enlarge the scope of a FISCU’s authority beyond what is permitted under
applicable state law.

How to use this Compendium:
This document is an integrated roadmap of Part 741. Each Section of Part 741 is listed in its
entirety. Where the text of Part 741 includes a cross-reference to other provisions of the U.S.C.
or CFR, such a cross-reference is indicated in bold. Click the bold text and your web browser will
automatically open the relevant provision at www.gpo.gov (for the U.S.C.) or www.ecfr.gov (for
the CFR).

Some provisions include a “Special Notes” section. These notes are not part of the text of Part
Rather, they are helpful links and guidance meant to make use the Compendium more
efficient.

Click here to access.

Final Rule Summary: Transition to CECL (Part 702)                 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

NCUA has issued a final rule to facilitate the transition of federally insured credit unions (FICUs) to the current expected credit loss (CECL) methodology required under Generally Accepted Accounting Principles (GAAP). Pursuant to the final rule, for purposes of determining a FICU’s net worth classification under the § 702 prompt corrective action (PCA) regulations, NCUA will phase-in the day-one adverse effects on regulatory capital that may result from adoption of CECL. The rule will mitigate the effect of CECL adoption on PCA capital while requiring FICUs account for CECL for other purposes, such as Call Reports.

FICUs with less than $10 million in assets, will be allowed to use any reasonable reserve methodology (incurred loss), provided that the chosen methodology adequately covers known and probable loan losses.

** Note: SCUs with less than $10 million in assets may still be required to follow GAAP pursuant to state law.

This rule becomes effective August 2, 2021. The rule may be read in its entirety here.

Summary

The final rule adds a new subpart G to the § 702 PCA regulations,

  • Eligibility Criteria – there are 2 criteria for phase-in eligibility:
    • FICUs have not adopted CECL prior to their first fiscal year beginning after the FASB CECL implementation date of December 15, 2022; and
    • The FICU must record a reduction in retained earnings due to the adoption of CECL.
  • Implementation of the Transition Provisions – phase-in of CECL for eligible credit unions is mandatory: NCUA will not allow eligible credit unions (those that have not already implemented CECL and for which CECL results in a reduction of retained earnings) to opt out. This differs from the banking rule, but NCUA has said for ease of administration they have chosen to make phase-in mandatory.
  • Mechanics of the CECL Transition – to calculate the phase-in amount, NCUA will compare the differences in a FICU’s retained earnings between:

(1) the FICU’s closing balance sheet amount for the fiscal year-end immediately prior to its adoption of CECL (pre-CECL amount); and

(2) the FICU’s balance sheet amount as of the beginning of the fiscal year in which the FICU adopts CECL (post-CECL amount).

The 3-year phase-in amount is the difference between the pre-CECL and post-CECL amounts of retained earnings. NCUA will phase-in the CECL transitional amount and make the adjustments for calculating a FICUs net worth ratio.

The Phase-In

FICUs are required to begin implementation of the CECL for fiscal years beginning after December 15, 2022. In the first 3 reporting quarters once CECL commences, NCUA will deem retained earnings and total assets as reported on the 5300 to be increased by 100% of the FICU’s CECL transitional amount. During this period, FICUs should build capital and may make resulting adjustments to their CECL transitional amount.

The NCUA will base subsequent phase-in calculations on the CECL transitional amount reported by the FICU as of the 4Q of the fiscal year of CECL adoption. Beginning with the 4th reporting quarter NCUA will deem retained earnings and total assets to be increased by 67% of the FICU’s CECL transitional amount. In the 4Q of year 2, this percentage will be decreased to 33%.

Commencing with the 12Q after adoption, A FICU’s net worth ratio will completely reflect the day-one effects of CECL.

NCUA Oversight

While NCUA will use the phase-in adjustment to determine a FICU’s net worth ratio for PCA compliance, NCUA will continue to use traditional supervisory oversite to examine credit loss estimates and allowance balances regardless of whether the FICU is subject to the CECL transition provision. For FICUs phasing-in CECL, NCUA may also evaluate whether the FICU will have adequate amounts of capital at the expiration of the CECL transition period.

Credit Unions with less than $10 million in Assets and ALLL Methodology

Although the FCUA provides an exception for GAAP requirements for FICUs, NCUA’s    § 702.402 requires all FICUs make charges for loan losses in accordance with GAAP without exception. The final rule provides that FICUs with less than $10 million in total assets may make charges for loan losses either in accordance with GAAP or with any reasonable reserve methodology (incurred loss) provided it adequately covers known and probable loan losses.

Final Rule Summary: Derivatives (Parts 701, 703, 741, & 746)                

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

NCUA has issued a final rule amending its provisions related to Derivatives transactions. For SCUs, the only relevant provisions of NCUA Derivatives Rules is the requirement to notify NCUA within 5 business days of having engaged in the credit union’s first derivatives transaction, and the exemption from notification for transactions listed in §703.14. The notification requirement is in § 741.219.

The final Derivatives rule is effective June 25, 2021. The final rule may be read here.

Summary

Although the following provisions of NCUA’s Derivatives Rule do not apply to FISCUs, NASCUS provides a brief overview of the FCU rules for informational purposes.

  1. Asset Threshold – NCUA is now allowing FCUs with $500+ million in assets, and a composite CAMEL rating of “1” or “2” to exercise derivatives authority without pre-approval from NCUA. FCUs will less than $500 million in assets need NCUA pre-approval before engaging in derivatives transactions.FISCUs do not need NCUA pre-approval to engage in derivatives transactions. SCUs look to state law for authority to use derivatives.
  2. FCUs with $500+ million in assets, and FISCUs, will be required to notify NCUA within 5 business days of entering into their first derivatives transactions.This is a change from the previous advance notice requirement.SCUs need not notify NCUA of engaging in transactions listed in § 703.14.
  3. Collateral Requirements – The final rule requires specific collateral types for non-cleared derivatives. Approved collateral includes:
    • Cash (U.S. dollars)
    • U.S. Treasuries
    • GSE debt
    • U.S. government agency debt
    • GSE residential mortgage-backed security pass-through securities
    • U.S. agency residential mortgage-backed pass-through securities
  4. Counterparties – The final rule retains the current rule’s counterparty provisions. For exchange-traded and cleared Derivatives, approved counterparties include:
    1. Swap Dealers
    2. Introducing Brokers
    3. Futures Commission Merchants that are current registrants of the CFTCFor Non-cleared Derivatives, registered CFTC Swap Dealers will be permitted to be the Counterparty.
  5. Liquidity Review – FCUs will be required to establish a liquidity review process to analyze and measure potential liquidity needs related to its Derivatives program before executing the credit union’s first derivatives transaction.
  6. Maturity – FCUs are limited to a 15-year maturity limit for derivatives.
  7. Written Options – The current FCU derivatives rule prohibits use of written options. NCUA will now permit written options but is adding a requirement that FCU derivatives may only be entered into to manage IRR.
  8. Pipeline Management – The final rule streamlines the pipeline management provisions to allow FCUs to use derivatives to manage interest rate risk for all of a FCU’s portfolio.
  9. Regional Director Authority – The final rule delegates authority to the NCUA Regional Director to prohibit a FCU from continuing to engage in derivatives transactions based upon regulatory or supervisory concerns.
  10. Monthly Reporting – FCUs must submit to their boards detailed monthly reports on the credit union’s derivatives activity. NCUA’s rule prescribes the contents of the monthly reports as well as record retention requirements.
  11. Derivative Transactions with Commercial Borrowers – FCUs are prohibited from entering into interest rate swaps with commercial borrowers. Final § 703.104(b) requires all FCU derivative counterparties to be regulated by the CFTC, and NCUA deems it unlikely that a commercial borrower would be CGTC regulated. Therefore, the final explicitly prohibits commercial borrowers from being counterparties for FCUs.
  12. USD LIBOR – NCUA is, for now, requiring FCU derivative contracts be based on Domestic Interest Rates or the USD London Interbank Offered Rate (LIBOR). NCUA reevaluate this provision after the cessation of the USD LIBOR.
Letter to Credit Unions 21-CU-05 Interagency Statement on the Issuance of the AML/CFT National Priorities

July 2021 — NCUA issued LTCU 21-CU-05 to provide credit unions information on the issuance of AML/CFT National Priorities and subsequent obligations for BSA compliance programs. The Anti-Money Laundering Act of 2020 (AML Act) requires the Secretary of the Treasury to establish priorities for AML/CFT policy. Those priorities were issued on June 30, 2021. The AML Act also requires credit unions and other covered entities to incorporate those priorities into their individual compliance programs once the federal banking agencies promulgate rules addressing the newly published priorities.

Specifically, NCUA informs credit unions:

  • NCUA plans to revise its BSA regulations, as necessary, to address how the AML/CFT Priorities will be incorporated into credit unions’ BSA requirements.
  • Credit unions are not required to incorporate the AML/CFT Priorities into their BSA compliance programs until the effective date of a final revised regulation. However, credit unions may wish to begin considering how the priorities could be incorporated into compliance programs.
  • NCUA examiners will not examine for incorporation of AML/CFT Priorities into BSA compliance programs until a final regulation implementing the AML/CFT Priorities becomes effective.

Legal Opinion 21-3500 Proposed Capital Markets Funding Program for Credit Unions

April 23, 2021

NCUA issued Legal Opinion 21-3500 to address issues related to a credit union funding program in which limited liability companies (LLCs) purchase share certificates from various federally insured credit unions (FICUs) where they are either members or otherwise eligible to maintain NCUA insured accounts. Under the proposed program, a given LLC would purchase a share certificate worth a maximum of $250,000, the standard maximum share insurance amount (SMSIA), at one or more FICUs.

Although NCUA was asked to confirm that each LLC’s account at the various FICUs was insured to the SMSIA, the GC responds that specific share insurance coverage will always be fact specific and predicated upon the individual or entity meeting all applicable requirements. NCUA’s GC did provide an overview of the issues involved in determining whether the LLCs would receive the SMSIA (share insurance coverage up to the $250k maximum).

In general, accounts held by entities such as an LLC are insured up to the SMSIA of $250,000 if they are engaged in an independent activity. NCUA notes that as long an LLC is engaged in “an activity other than one directed solely at increasing insurance coverage” the LLC will be found to be engaged in an independent activity and therefore qualify for maximum share insurance coverage.

NCUA was also asked if each LLC depositor in the proposed program at a single FICU would receive separate maximum share insurance coverage and not have their separate accounts aggregated for coverage purposes.

NCUA’s GC again noted that the answer would be fact specific, but also confirmed that in general, separate legal entities that are engaged in independent activities and are the true owners of the funds in the account they maintain are eligible to receive coverage up to the SMSIA.

In closing, the GC stressed that for an LLC to receive coverage, it must legally own the funds in the account and be a member of the FICU or otherwise qualify to maintain an insured account at the FICU.

###

Final Rule Summary: Capitalization of Interest (Parts 741) 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

NCUA has issued a final rule lifting the Part 741 Appendix B prohibition on the capitalization of interest in connection with loan workouts and modifications. The final rule also 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. In addition, NCUA has made several technical changes to the existing regulation intended to improve clarity.

The final rule applies to all federally insured credit unions (FICUs).

The final Capitalization on Interest rule is effective 30 days after publication in the Federal Register. The rule may be read in its entirety here.

Summary

A May 3, 2012, NCUA rule established loan workout and monitoring requirements applicable to all FICUs, including mandating that FICUs have written policies addressing loan workouts and nonaccrual practices and prohibiting additional advances to a borrower to finance unpaid interest (capitalization of interest) and credit union fees and commissions. Under the 2012 rule, FICUs were permitted to advance funds to cover 3rd-party fees, such as force-placed insurance and property taxes.

In lifting the prohibition against capitalization of interest, NCUA cites both FICUs need for greater flexibility to work with borrowers adversely impacted by the pandemic as well as the fact that while the federal banking agencies provide guidance to banks on the practice, the agencies do not prohibit financing of unpaid interest.

The Final Rule

  • Prohibition on Capitalization of Interest Removed Indefinitely – § 741, Appendix B, is amended to permit FICUs to capitalize interest in connection with loan workouts and modifications. While this change applies to workouts of all types of loans (including commercial and business loans); it only applies to loan modifications.
  • Capitalization of Interest Defined – Appendix B will define capitalization of interest as constituting the addition of accrued but unpaid interest to the principal balance of a loan.
  • Capitalizing FICU Fees and Commissions is Still Prohibited – While the final rule amends Appendix B to allow capitalization of interest, FICUs are still prohibited from capitalizing their owns fees and commission. However, funds may be advanced to cover 3rd party fees to protect loan collateral (such as force placed insurance or property taxes).
  • Consumer Protection – NCUA is maintaining several Appendix B requirements that apply to all loan workout policies to provide consumer protection guardrails. For example:
    • NCUA expects that loan workouts will balance the best interests of the FICU and the borrower.
    • A FICU’s policy must establish limits on the number of modifications allowed for an individual loan and must ensure that loan workout decisions are based on a borrower’s renewed willingness and ability to repay.
    • FICUs must maintain sufficient documentation to demonstrate that the new terms were communicated to the borrower; that the borrower agreed to pay the loan in full under the new terms; and, most importantly, that the borrower can repay the loan under the new terms.

NCUA also notes that if a FICU restructures a loan more frequently than once a year or twice in five years, examiners will have higher expectations for the documentation of the borrower’s renewed willingness and ability to repay the loan. If a FICU engages in multiple restructurings, examiners will request validation documentation regarding collectability of the loan.

  • New Loan Modification Policy Requirements – For FICUs that capitalize interest, NCUA has added new requirements for loan modification policies:
    • The policy must require compliance with all applicable consumer protection laws and regulations, including the ECOA, the Fair Housing Act, TILA, RESPA, FCRA, CFPB’s UDAP prohibitions, and any applicable state laws (that in some cases may be more stringent than federal law).
    • Documentation must reflect a borrower’s ability to repay and sources of funds for repayment. Documentation must also reflect, as appropriate, compliance with the FICU’s valuation policies at the time the modification is approved.
    • Borrowers must be provided with documentation that is accurate, clear, and conspicuous and consistent with Federal and state consumer protection laws.
    • Loan status for modified loans must be reported in accordance with applicable law and accounting practices. Modified loans should not be reported as past due if the loan was current prior to modification and the borrower is complying with the terms of the modification.

Specifically, Appendix B requires FICUs maintain prudent policies and procedures that both 1) help borrowers resume appropriately restructured payments (payments that are affordable and sustainable); and 2) minimizing losses to the credit union. The prudent policies and procedures must consider:

    • Whether the loan modifications are well-designed, consistently applied, and provide a favorable outcome for borrowers.
    • The available options for borrowers to repay any missed payments at the end of their modifications to avoid delinquencies or other adverse consequences.
    • Appropriate safety and soundness safeguards to prevent the following:
      • Masking deteriorations in loan portfolio quality and understating charge-off levels;
      • Delaying loss recognition resulting in an understated ALLL account or inaccurate loan valuations;
      • Overstating net income and net worth (regulatory capital) levels;
      • Circumventing internal controls.
  • Technical Updates to Appendix B – NCUA also made several technical updates to Appendix B intended to improve the rule’s clarity and update certain references. Examples of these technical changes include:
    • Clarifying that Appendix B is a mandatory regulatory requirement rather than guidance. For example, current Appendix B uses both the mandatory “should” while also referring to certain provisions, inaccurately, as “guidance.” References to the Appendix as “guidance” are being removed.
    • Updating references to other guidance in the Appendix. For example, the final rule updates references to the NCUA’s or other guidance in the Appendix such a conform the FASB reference in the Appendix to changes made by FASB to its guidance.
    • Conform terminology to current usage. For example, NCUA now uses the term commercial lending rather member business lending.

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21-RA-06 CFPB Delays Mandatory Compliance Date of General Qualified Mortgage (QM) Final Rule Under Truth in Lending Act

June 2021

Earlier this year, NCUA issued Regulatory Alert 21-RA-01 to provide credit unions information on CFPB changes to the ATR/QM Rule made in December 2020. However, in April, 2021, CFPB issued a final rule amending TILA’s Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). This new final rule makes changes to provisions covered in 21-RA-01. NCUA issued Regulatory Alert 21-RA-06 to address these changes.

The April final rule from the CFPB made changes to 2 QM loans:

  •  General QMs (12 CFR 1026.43)

 The December 2020 QM Rule amended Reg Z by replacing the General QM loan definition of debt-to-income (DTI) limit with a limit based on loan pricing and making other changes to the General QM loan definition. These changes took effect on March 1, 2021 (with mandatory compliance starting July 1, 2021).

Under the April 2021 final rule, mandatory compliance is extended from July 1, 2021 until October 1, 2022. In addition, a lender can use either the original underwriting process (with the 43% DTI limit) or the new underwriting process (with price-based thresholds) for applications received from March 1, 2021, to September 30, 2022.

Lenders must use the revised General QM loan definition for applications received on or after October 1, 2022.

  •  Temporary GSE QMs (12 CFR 1026.43)

 Temporary GSE QMs are eligible to be purchased or guaranteed by either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (the GSEs), while operating under the conservatorship or receivership of the FHFA. A 2020 rule limited the Temporary GSE QM loan definition to covered transactions for which the lender receives the consumer’s application before the mandatory compliance date of the General QM Final Rule (Jul1, 2021).

Under the April 2021 final rule, the Temporary GSE QM loan definition now expires upon the earlier of October 1, 2022, or the date the applicable GSE exits federal conservatorship. This is known as “the GSE Patch.”

For additional information, see the CFPB’s compliance guide and other resources.