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The NCUA finalized a CUNA-backed rule lifting the ban on interest capitalization in restructuring and loan modifications in June. The agency sent a letter to credit unions (21-CU-07) last week about the rule, which went into effect on July 30 and applies to restructurings or loan modifications from that date.
“For borrowers facing financial difficulties, a prudently underwritten and appropriately managed loan modification, consistent with safe and sound lending practices, is generally in the best long-term interest of the borrower and the co-op. credit, â€the letter reads. “Modification options include reducing loan repayments or the interest rate, extending the maturity date, partially forgiving principal or interest, and capitalizing interest.
“Such changes can allow a borrower to repay the loan, which helps the borrower and the credit union avoid the costs of default and foreclosure,” he adds.
The final rule continues to prohibit credit unions from funding the fees and commissions of credit unions. Credit unions will be allowed to continue to make advances to cover third-party costs to protect loan guarantees, such as forced insurance or property taxes.
“The NCUA continues to encourage credit unions to work with their members who are experiencing financial hardship due to the COVID-19 pandemic using safe and healthy approaches,” the letter reads. “Therefore, the NCUA will not object to previous loan modifications, including capitalization interest, prior to the effective date of this rule change if such efforts are carried out in a reasonable manner with appropriate controls and proper supervision. management oversight.
The letter also details the consumer protection and credit risk considerations arising from the rule.
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