NCUA: Capitalization of Unpaid Interest; Interest Rate Ceiling; Committee Testimony

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Letters Outline Limits on Capitalizing Loans

On June 24, 2021, the National Credit Union Administration (NCUA) board unanimously voted to lift the prohibition of capitalization of interest in connection with loan workouts and modifications from part 741, Appendix B. The rule became effective July 30, 2021, and applies to loan workouts and modifications on or after this date. The rule establishes documentation requirements to help ensure that the addition of unpaid interest to the principal balance of a loan does not hinder the borrower’s ability to repay the loan.

For borrowers experiencing financial hardship, a prudently underwritten and appropriately managed loan modification, consistent with safe and sound lending practices, is generally in the long-term best interest of both the borrower and the credit union. 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.

Read the letter here.


Permissible Loan Interest Rate Ceiling Extended for Federal Credit Unions

In a letter to federal credit unions, the NCUA communicates the board’s decision to continue the current 18 percent interest rate ceiling for loans made by federal credit unions, through March 10, 2023, based on the authorities established by the Federal Credit Union (FCU) Act.  

The board voted during its June 24 meeting to extend the ceiling, which was set to expire on Sept. 10, 2021.

The letter explains that although the FCU Act generally limits federal credit unions to a 15 percent interest rate ceiling on loans, it provides the NCUA board flexibility to establish a higher rate for up to 18 months after considering certain statutory criteria.

The letter further adds that the board preserves federal credit unions’ ability to offer a higher rate payday alternative loan. Federal credit unions may still charge up to 28 percent on payday alternative loans under the terms and conditions specified in NCUA’s regulations.

Read the letter here.  

NCUA Chairman Testifies Before the Senate Banking Committee

The nation’s banking regulators testified before the Senate Banking Committee on Aug. 3 in a hearing to provide their semi-annual reports. NCUA Chairman Todd Harper joined the other regulators to take on an extensive list of issues.

There was no major announcement or policy action, although Chairman Harper advocated his prior positions which include expanding exam authority to third-party vendors, allowing the NCUA to assess greater premiums and making the borrowing authority for the Central Liquidity Facility permanent. Some great points were made about access to serving low-income and rural communities, as well as a significant focus on Minority Depository Institutions and Community Development Financial Institution (CDFI) credit unions. Chairman Harper noted that over the last year, $3.7 million was issued to 162 credit unions from the Community Development Revolving Loan Fund and he was seeking $10 million for this year’s line item. The House has currently allocated $4 million in this year’s budget on which the Senate has yet to act. There was also a hefty discussion on the Treasury’s Emergency Capital Investment Program, and the need for supplemental capital funds.

Chairman Harper also directed his attention to supervisory guidance, stating that examiners were instructed to avoid penalizing credit unions that were aiding distressed borrowers caused solely due to the pandemic. Lastly, the committee directed back to last week’s hearing regarding extending the Military Lending Act’s 36% all-in usury rate to all consumers. The bulk of the discussion centered around the NCUA’s Payday Alternative Loans programs. 

Click here to view the hearing.

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