During its June meeting, the NCUA Board finalized amendments to Appendix B to Part 741 of the Rules and Regulations, Policy Statement on Loan Workouts, Nonaccrual Policy and Regulatory Reporting of TDRs (Workout Policy). Under the Workout Policy, effective Friday, July 30, federally insured credit unions (FICU) may capitalize interest in connection with loan workouts and modifications.
New documentation requirements apply aimed at ensuring the addition of unpaid interest to the balance of a mortgage loan does not damage the borrower’s ability to bring the loan current.
NCUA defines capitalizing interest as adding accrued but unpaid interest to the principal balance of a loan. Again, the tool would be used in connection with loan workouts or modifications. NCUA kept the prohibition against the credit union financing its fees and commissions. However, advances may be made for third-party fees to protect loan collateral such as force-placed insurance or property taxes.
If a FICU will capitalize interest is must observe the following it is loan modification policy:
- Compliance with all federal and state consumer protection laws.
- Document the borrower’s ability to repay such as the borrower’s sources of repayment, and, when appropriate, compliance with the credit union’s valuation policies at the time the modification is approved.
- Providing the borrower with accurate, clear and conspicuous written disclosures consistent with federal and state consumer protection laws.
- Report the loan status of a modified loan consistent with applicable law and accounting practices.
- The policy should reflect the credit union’s effort to help the borrower resume affordable and sustainable payments. Payments should be structured appropriately but aimed at minimizing losses.
The revised Workout Policy instructs FICUs to include safety and soundness safeguards to prevent:
- Masking of deterioration of portfolio quality and understating charge-offs;
- Delaying loss recognition causing an understated allowance for loan loss or inaccurate valuations;
- Overstating net income and net worth; and
- Circumventing internal controls.
The Workout Policy makes some technical changes to nonaccrual policy and restoration to accrual status. C4CU would be delighted to provide direction. Please contact us at wargor@compliance4creditunions.com.
