(Aug. 20, 2021) Summaries of three recent issuances from NCUA – on capitalizing loans, the rollout of the new examination tool, and on mortgage servicing rules – were published by NASCUS this week.
All three are available to members only. The summaries cover issuances – two letters to credit unions and one regulatory alert – issued by the agency over the last three weeks or so.
Early this month, the agency issued letter to credit unions (LTCU) 21-CU-07, which outlined limits on capitalization of loans to members. In particular, the letter pointed out, the financing of fees and commissions continue to be prohibited for federally insured credit unions, despite adoption of the new rule earlier this year allowing capitalization of loan interest. In the letter, 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 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 second letter (LTCU 21-CU-08) summarized listed the new applications (and their implementation) the agency is employing for assisting in exams and communicating to credit unions. The letter, issued just last week, noted that the agency would begin transitioning to its new Modern Examination and Risk Identification Tool (MERIT) exam tool and other applications meant to modernize and streamline the agency’s operations. The other tools include the Data Exchange Application (DEXA), the Administrative Portal, and the Consumer Access Process and Reporting Information System (CAPRIS) for federal credit unions.
The letter also offers insights about who at credit unions can use the new tools, and how the tools integrate with state supervisory authority (SSA) examination and supervision programs.
The third item summarized by NASCUS and published this week is of a regulatory alert (21-RA-08), which urges review of CFPB mortgage servicing rules. According to the alert, credit unions are urged to review the June 30 rule temporarily amending certain mortgage servicing requirements under the bureau’s Regulation X to assist borrowers affected by the COVID-19 emergency. The alert noted that the CFPB rule — which takes effect Aug. 31 — only applies to servicers that service mortgages secured by a borrower’s principal residence and does not apply to small servicers.
LINKS:
NASCUS summary: LTCU 21-CU-07, Capitalization of Unpaid Interest (members only)
NASCUS summary: LTCU 21-CU-08, Implementation of Modernized Systems (members only)
NASCUS summary: 21-RA-07 Equal Credit Opportunity Act (Regulation B) (members only)
(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.
LINK:
NCUA Letter to Credit Unions 21-CU-07: Capitalization of Unpaid Interest
(July 2, 2021) NCUA’s final rule permitting federally insured credit unions (FICUs) to extend financing of interest in connection with loan workouts and modifications is set to take effect July 30, according to the notice published this week in the Federal Register. Adopted last week by the NCUA Board, the final 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, the notice states, and makes technical changes … Meanwhile, a final rule permitting FICUs to phase in over three years the day-one adverse effects on net worth of the current-expected-credit-loss (CECL) accounting methodology is set to take effect Aug. 2, according to a notice in Thursday’s Federal Register … The list of jurisdictions with strategic money laundering, and financing of terrorism and weapons of mass destruction proliferation risks has been updated by FinCEN. Haiti, Malta, the Philippines, and South Sudan were added to the list; Ghana was removed, FinCEN said … Elissa McCarter LaBorde is the World Council of Credit Unions’ (WOCCU) new president and CEO, succeeding Brian Branch who announced his retirement earlier this year. LaBorde, according to WOCCU, has more than 20 years’ experience in leading organizations that deliver financial services to underserved communities world-wide … Have a terrific (and safe) Independence Day holiday!
LINKS:
Capitalization of Interest in Connection With Loan Workouts and Modifications
(June 25, 2021) NASCUS President and CEO Lucy Ito said the state system embraces both new rules, which the association had supported. On interest capitalization, Ito said the new rule will provide greater flexibility for the credit union system to work with economically distressed members. “This rule will expand the options for loan repayments by members working to regain their economic footing as the financial impact of the coronavirus crisis begins to recede,” she said.
On the CECL standard rule, Ito thanked the board for heeding the state system’s suggestions on recognizing fiscal years and clarifying eligibility for small, state-chartered credit unions subject to GAAP.
She also took note of comments by NCUA Board Vice Chairman Kyle Hauptman about CECL and its applicability to credit unions as financial cooperatives. “Vice Chairman Hauptman keenly observed the cooperative structure of credit unions differentiates them from other financial intermediaries,” Ito said.
However, she added that “NASCUS believes CECL should apply to credit unions given their business functions as depositories and lenders. We look forward to working with NCUA on tools and resources to assist credit unions in complying with CECL in a cost-effective and time-effective manner.”
(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.
LINKS:
Final Rule, Part 741, Appendix B, Capitalization of Interest.
Final Rule, Part 702, Current Expected Credit Loss Methodology
(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.
LINKS:
NCUA Board Agenda for the June 24, 2021 Meeting
NASCUS Comments on Transition to the Current Expected Credit Loss Methodology
(April 23, 2021) While no new regulations were proposed or finalized, the NCUA Board did indicate at its meeting Thursday that final rules on two NASCUS-supported proposals – on capitalization of interest and derivatives — are nearing the point of being considered soon, according to comments during this week’s meeting.
In open session of the NCUA Board, Chairman Todd Harper said staff is “working through” issues on proposed rules for capitalization of interest and on derivatives. Harper said he was hopeful to see actions on the proposals “in the near future.”
The issue of action on proposed or pending regulations was brought up by Board Member Rodney Hood. Thursday’s meeting included only board briefings, on cybersecurity and an interim final rule addressing the impact of savings growth due to the coronavirus crisis on credit union capital.
Hood, in his comments, suggested the board work in the future “in a bipartisan manner” to develop board meeting agendas for “robust rulemaking opportunities.” Hood indicated that there are proposed rules awaiting action (and proposals waiting to be unveiled) that he and the other board members want to see move forward.
The capitalization of interest rule was proposed in November by the NCUA Board; it would remove the prohibition in agency rules against the capitalization of interest in connection with loan workouts and modifications, particularly as they struggled with the financial impact of the coronavirus crisis.
NASCUS, in its February comment letter, supported the proposal and called for its expeditious completion. NASCUS also recommended the agency reconsider the blanket prohibition against additional advances, to cover credit union fees and provide them with “the full range of options for managing and structuring loan work outs as other depository institutions.”
The derivatives rule was proposed in October; it would make the agency’s regulation less prescriptive and more “principles-based,” expanding federal credit unions’ authority to purchase and use derivatives as part of their interest-rate risk (IRR) management. NASCUS likewise supported the proposal in its December comment letter, calling for two changes: eliminate the redundant supervisory notice requirements where applicable, and incorporate exempt derivatives transactions directly into part 741.219 of NCUA rules – the section that covers federally insured state-chartered credit unions (FISCUS) and investment requirements.
NASCUS also noted that the proposal continues recognition by NCUA of the primacy of state law in determining investment authority for FISCUs.
Both items were issued for comment without objection by any members of the board.
NASCUS comment: Proposed Rule — Derivatives (RIN 3133–AF29)
(April 23, 2021) Following the Thursday NCUA Board meeting, NASCUS President and CEO Lucy Ito echoed the comments the association filed earlier this year that the agency should move forward quickly on finalizing the capitalization of interest rule. “As we said in February, we have no doubt credit unions will exercise the ability to capitalize interest to the benefit of their members in need. We are confident in the ability of state examiners to provide supervisory oversight of loan workouts and modifications,” she said. “Modernizing the existing and overly prescriptive limitations related to credit union loan modifications is crucial. When finalized, this rule will benefit both credit unions and economically distressed members – sorely needed relief for both.”
(Feb. 5, 2021) A proposed rule allowing credit unions to capitalize interest should be finalized “expeditiously,” NASCUS said in a comment letter to NCUA this week, noting its support for the rule.
“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.
The comment letter was filed in response to the NCUA Board’s proposal issued Nov. 19., the board suggested, in issuing the proposal, 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.”
NASCUS agreed, writing its comment letter that finalizing the proposal would provide credit unions’ greater flexibility to work with economically distressed members. “That enhanced flexibility benefits distressed credit union borrowers by expanding the options for repayment programs as the member regains their economic footing,” NASCUS wrote. “Concurrently, provisions of the rule protecting the best interests of the borrower provide consumer protection guardrails that protect against the unlikely chance that a credit union engages in unfair lending practices.”
The state system made one recommendation through the NASCUS letter: that the agency reconsider the blanket prohibition contained in the proposal against additional advances to cover credit union fees and provide credit unions the full range of options for managing and structuring loan work outs as other depository institutions.
“Credit unions have both the ability and integrity to balance the interests of the credit union, distressed borrowers, and other members,” NASCUS wrote.
(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.
LINK:
Proposed Rule, Part 741, Appendix B, Capitalization of Interest