Capitalization of Interest in Connection With Loan Workouts and Modifications
| Published date | 30 June 2021 |
| Record Number | 2021-13906 |
| Section | Rules and Regulations |
| Court | National Credit Union Administration |
Federal Register, Volume 86 Issue 123 (Wednesday, June 30, 2021)
[Federal Register Volume 86, Number 123 (Wednesday, June 30, 2021)]
[Rules and Regulations]
[Pages 34611-34621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13906]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 741
[NCUA 2020-0114]
RIN 3133-AF30
Capitalization of Interest in Connection With Loan Workouts and
Modifications
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) is amending its regulations to remove
the 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. The Board has
also taken the opportunity afforded by the rulemaking to make several
technical changes to the regulations to improve their clarity and
update certain references. The final rule follows publication of the
December 4, 2020, proposed rule and takes into consideration the public
comments on the proposed rule. After careful consideration, the Board
has decided to adopt the proposed rule without change.
DATES: Effective July 30, 2021.
FOR FURTHER INFORMATION CONTACT: Policy: Alison L. Clark, Chief
Accountant, and Timothy C. Segerson, Deputy Director, Office of
Examinations and Insurance, at (703) 518-6360; Legal: Ariel Pereira and
Gira Bose, Senior Staff Attorneys, Office of General Counsel, at (703)
518-6540.
SUPPLEMENTARY INFORMATION:
I. Background: The Board's December 4, 2020, Proposed Rule
II. Legal Authority
III. Discussion of Public Comments Received on the December 4, 2020,
Proposed Rule
IV. This Final Rule
[[Page 34612]]
V. Regulatory Procedures
I. Background: The Board's December 4, 2020, Proposed Rule
At its November 19, 2020, meeting, the Board proposed amending the
NCUA's regulations to remove the prohibition on the capitalization of
interest in connection with loan workouts and modifications. The
proposed rule was subsequently published in the Federal Register on
December 4, 2020.\1\ The prohibition is codified in Appendix B to Part
741 (hereinafter referred to as ``Appendix B'') of the NCUA's
regulations.
---------------------------------------------------------------------------
\1\ 85 FR 78269 (Dec. 4, 2020) (https://www.govinfo.gov/content/pkg/FR-2020-12-04/pdf/2020-25988.pdf).
---------------------------------------------------------------------------
As explained in the preamble to the December 4, 2020, proposed
rule, the NCUA established the prohibition on authorizing additional
advances to finance unpaid interest in a May 3, 2012, final rule.\2\
The May 2012 final rule established loan workout and monitoring
requirements applicable to all federally insured credit unions (FICUs).
Among other amendments, the final rule required that FICUs have written
policies addressing loan workouts and nonaccrual practices. Under that
final rule, such policies were required to prohibit a FICU from
authorizing additional advances to a borrower to finance unpaid
interest (capitalization of interest) and credit union fees and
commissions. However, the final rule permitted FICUs to make such
advances to cover third-party fees, such as force-placed insurance and
property taxes.
---------------------------------------------------------------------------
\2\ 77 FR 31993 (May 31, 2012) (https://www.govinfo.gov/content/pkg/FR-2012-05-31/pdf/2012-13214.pdf).
---------------------------------------------------------------------------
The Board was prompted to reconsider these prohibitions because of
the challenges and economic disruption caused by the COVID-19 pandemic.
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 FICU. Such modifications may allow a borrower
to remain in their home or a commercial borrower to maintain operations
and can help FICUs minimize the costs of default and foreclosures.
Thus, the prohibition in the May 2012 final rule on the capitalization
of interest might be overly burdensome and, in some cases, possibly
hamper a FICU's good-faith efforts to engage in loan workouts with
borrowers facing financial difficulty.
Other considerations, such as parity with the treatment of interest
capitalization by banks, also factored in the Board's determination.
Banks are not subject to the same prohibition on capitalizing interest
(the banking agencies have not adopted an absolute standard equivalent
to the rule that the Board codified in 2012). The banking agencies have
addressed capitalization of interest through guidance, letters, and
Call Report instructions, none of which strictly prohibit the
capitalization of interest when modifying loans. Further, the
government-sponsored enterprises (GSEs)--Fannie Mae and Freddie Mac--
have had a long-standing policy supporting the ability of servicers to
capitalize interest and fees as part of a prudent modification program.
Accordingly, the Board issued the December 4, 2020, proposed rule
to make capitalization of interest a permissible option indefinitely.
The proposed rule applies to workouts of all types of member loans,
including commercial and business loans. In proposing the change, the
Board underscored that Appendix B currently requires several safety and
soundness and consumer protection-oriented measures that would also
apply to capitalizing interest. The Board also proposed to add several
consumer protection and safety and soundness requirements to Appendix B
for FICUs when they modify loans with an interest capitalization
component.
The proposed rule also makes several technical changes to Appendix
B to improve its clarity and update certain references. Interested
readers should refer to the preamble of the December 4, 2020, proposed
rule for additional background and information on the proposed
regulatory changes.
II. Legal Authority
The Board issues this final rule pursuant to its authority under
the Federal Credit Union (FCU) Act.\3\ Under the FCU Act, the NCUA is
the chartering and supervisory authority for federal credit unions
(FCUs) and the Federal supervisory authority for FICUs.\4\ The FCU Act
grants the NCUA a broad mandate to issue regulations that govern both
FCUs and FICUs. Section 120 of the FCU Act is a general grant of
regulatory authority and authorizes the Board to prescribe rules and
regulations for the administration of the FCU Act.\5\ Section 209 of
the FCU Act is a plenary grant of regulatory authority to the NCUA to
issue rules and regulations necessary or appropriate to carry out its
role as share insurer for all FICUs.\6\ Accordingly, the FCU Act grants
the Board broad rulemaking authority to ensure that the credit union
industry and the National Credit Union Share Insurance Fund remain safe
and sound.
---------------------------------------------------------------------------
\3\ 12 U.S.C. 1751 et al.
\4\ 12 U.S.C. 1752-1775.
\5\ 12 U.S.C. 1766(a).
\6\ 12 U.S.C. 1789(a)(11).
---------------------------------------------------------------------------
III. Discussion of Public Comments Received on the December 4, 2020,
Proposed Rule
A. The Comments, Generally
The proposed rule provided for a 60-day public comment period,
which closed on February 2, 2021. The NCUA received 26 comments in
response to the proposed rule. These came from FICUs, individuals, and
credit union leagues and trade associations. In general, the commenters
expressed support for lifting the prohibition on interest
capitalization as a helpful tool to assist financially distressed
borrowers. The main reasons given by commenters for supporting the
proposed rule were parity with banks, which are not prohibited from
capitalizing interest; parity for FICU members whose loans are held in
portfolio by the originating FICU and who, unlike members whose loans
are sold on the secondary market, cannot currently take advantage of
interest capitalization; and flexibility for distressed borrowers for
whom interest capitalization may be the only realistic solution for
avoiding foreclosure.
While noting the Board's interest in receiving public comment on
all aspects of the interest capitalization issue, the preamble to the
proposed rule also provided six questions requesting input on specific
issues related to the proposed rule. This section of the preamble
summarizes the issues raised by the public commenters and provides the
Board's responses to these issues. This comment summary is organized in
two sections. The first addresses the comments received in response to
the questions posed in the preamble. The second section summarizes the
other issues raised by the commenters. As previously noted, and
discussed more fully in the responses below, after careful review of
the comments, the Board has elected to adopt the proposed regulatory
amendments without change. However, the Board is clarifying below its
supervisory position with regard to FICUs that may already have begun
offering interest capitalization prior to the finalization of this
rule.
B. Comments on Specific Provisions
Responses to NCUA Questions 1 to 4. The NCUA asked FICUs to lay out
their
[[Page 34613]]
experience or level of use with interest capitalization before the
agency prohibited the practice in 2012. Of those that answered the
question, one FICU stated that it did not allow the use of this
mortgage modification tool. Others stated that it was beneficial,
including one who said it was frequently used, particularly during the
last financial crisis. One FICU stated that its program enjoyed an 85
percent success rate from 2010 to 2012 and included approximately 170
workouts representing about $22 million in mortgage loans that were
saved from foreclosure.
The NCUA also asked how likely FICUs would be to use interest
capitalization if the prohibition is lifted. All FICUs that answered
the question stated that they would use the tool to varying degrees
largely dependent on its suitability for individual borrowers.
The NCUA asked what risks might arise either to the FICU or the
borrower in a mortgage modification that includes capitalization of
interest. Of those that answered the question, one commenter stated
that the risks would include a lack of understanding on the member's
part of what interest capitalization means for their loan and there
could be risk to the FICU if interest is capitalized on loans that
already have high loan-to-value ratios. This commenter noted, however,
that such risks could be effectively mitigated by the FICU providing
clear communication to its members and reviewing its member's ability
to repay the modified loan. Some stated that the consumer protection
guardrails in the proposed rule would help mitigate any consumer
protection risks. Others noted that the risk of not permitting interest
capitalization needed to be weighed against any potential risk in
permitting the practice. Some commenters noted that they evaluate each
member's situation individually and did not anticipate any risks to the
FICU or the member.
The NCUA asked how the limitations imposed by the GSEs on the use
of interest capitalization would impact a credit union's use of this
mortgage modification tool. Those that answered this question stated
that the impact would be minimal. One FICU stated that they already
underwrite to Fannie Mae guidelines and are aware of the limitations.
One commenter stated that loans that feature interest capitalization
would not be loans that it would sell on the secondary market. Another
stated that its recent sales to the GSEs were all newly originated and
that a loan requesting forbearance between origination date and sale
date is expected to occur so infrequently that it would be of no
concern.
NCUA Response. The NCUA appreciates the thoughtful comments
submitted in response to the first four questions posed in the preamble
to the December 4, 2020, proposed rule. The comments indicate that
interest capitalization was used prior to the 2012 change in policy,
and that it will likely again be used following the issuance of this
final rule. Accordingly, the Board continues to believe that the
capitalization of interest, when used prudently, can be a helpful loan
modification tool in the best interests of members and FICUs. In
response to the commenters concerned the change may raise risks for
consumers, the Board reiterates that the consumer protection measures
that currently apply to FICU loan workout policies also apply to loan
workouts involving the capitalization of interest. In addition, as
provided in the proposed rule, the Board is adding several consumer
protection requirements that will apply to loan workouts involving the
capitalization of interest.
Comment: Consumer Protection Guardrails. NCUA question 5 asked
commenters to provide their feedback on the consumer protection
guardrails and documentation requirements in the proposed rule. The
proposed rule states that capitalization of interest is not an
appropriate solution in all cases and, as Appendix B currently
provides, a FICU should consider and balance the best interests of the
FICU and the borrower. The Board proposed adding several consumer
protection and safety and soundness requirements to the Appendix for
FICUs that capitalize interest in connection with loan workouts. At a
minimum, if a FICU's loan modification policy permits capitalization of
unpaid interest, under the proposed rule, the policy would have to
require documentation that reflects a borrower's ability to repay, a
borrower's source(s) of repayment, and when appropriate, compliance
with the FICU's valuation policies at the time the modification is
approved.
Of the commenters that referenced the documentation requirements,
17 stated that they support them. Some of these commenters, however,
asked for clarification or suggested changes to certain aspects of the
requirements. For example, one of the commenters suggested additional
consumer guardrails to prohibit changes in loan terms such as interest
rates or punitive fees established in the existing loan contract.
Another commenter asked for clarification as to whether the proposed
consumer protections would apply to all loan types, including business
and commercial, or just consumer loans. Another commented that NCUA
should strive for balance so that administrative burdens do not
outweigh member benefits and noted that temporary income impairment may
prevent a member from providing the documentary proof that examiners
traditionally expect. Finally, one of these commenters added that NCUA
examiners should refrain from adding documentation requirements beyond
those in the proposed rule and, absent a safety and soundness issue,
should also defer to the judgment of the FICU and its understanding of
a borrower's ability to repay the loan.
Four commenters stated that existing consumer protection measures
are sufficient to protect and inform members, including two whose
specific comments are set forth below. One commenter stated that the
requirement to document a borrower's ability to repay would be
problematic with COVID-related loans due to the enormous volume of
members requesting COVID-related assistance. For example, if the FICU
is capitalizing interest it would be increasing the current loan amount
to avoid delays and unnecessary paperwork. Furthermore, if the new loan
amount does not exceed 110 percent of the original loan amount then the
FICU does not need to verify income or request a new appraisal. In
these situations, a certification from the borrower that his/her income
has not decreased from the time the loan was originally approved should
suffice. Therefore, the NCUA should waive the ``ability-to-repay''
documentation requirements in these instances.
The second commenter stated that the revisions required of a FICU's
modification policy are so burdensome that they will deter many FICUs
from offering interest capitalization because the requirements
effectively require FICUs to complete a full underwriting of a modified
loan multiple times. The commenter stated that the NCUA's existing rule
already requires credit unions to make loan workout decisions based on
a borrower's renewed willingness and ability to repay the loan and if a
loan workout is granted then the credit union must document the
determination that the borrower is willing and able to repay the loan.
This existing requirement thus fulfils the ability to repay and
documentation requirements while recognizing the need for flexibility.
The commenter stated that the existing rule also enables FICUs to
respond to large-scale, short-term financial challenges arising, for
[[Page 34614]]
example, from natural disasters such as hurricanes, temporary gaps in
employment, or the current pandemic which may make it difficult to
access documentation, even though the FICU reasonably determines that
the borrower's mid- to long-term income prospects remain intact.
Finally, the commenter stated that the way the proposed rule is
drafted implies that these additional documentation requirements would
apply to all modification types if the credit union merely permits
interest capitalization.\7\
---------------------------------------------------------------------------
\7\ The proposed rule states in the regulatory text:
``Modifications of loans that result in capitalization of unpaid
interest are appropriate only when the borrower has the ability to
repay the debt in accordance with the modification. At a minimum, if
a FICU's loan modification policy permits capitalization of unpaid
interest, the policy must require each of the following . . .''
(Supra note 1, at 78272).
---------------------------------------------------------------------------
NCUA Response. The Board appreciates the support expressed by the
large majority of commenters for the proposed consumer protection
guardrails. The final rule adopts these consumer protection measures
without change.
Appendix B applies to consumer and commercial loans. The rule
requires that loan modification policies must provide for
``[c]ompliance with all applicable consumer protection laws and
regulations.'' The term ``applicable'' indicates that FICUs must comply
with the laws and regulations that apply to a particular transaction.
While some of those, such as the Equal Credit Opportunity Act, might
apply to a commercial loan, most will not.
As noted, one of the comments suggested additional consumer
guardrails to prohibit changes to interest rates or fees. The Board
designed the proposed rule to provide FICUs greater flexibility when
restructuring an existing loan. However, the proposed rule requires
that, when doing so, a FICU must consider whether the loan modification
is well-designed and provides a favorable outcome for borrowers. While
a fair consideration of a borrower's circumstances would generally not
support an increase to interest rates or fees, the Board believes the
language of the proposed rule provides the desired protections and
declines to change it at this time.
In response to the commenters who raised concerns that compliance
with the new requirements might be burdensome, the Board notes that the
consumer protection guardrails added by this rule apply solely to loan
modifications that involve the capitalization of interest. FICUs will
therefore not be required to comply with the additional documentation
requirements for other types of loan modifications. In addition,
several of the guardrails reflect current best practices and
requirements that should not impose any additional significant burden
on credit unions. For example, credit unions are already required to
comply with all applicable consumer protections laws and regulations.
The guardrails reiterate the need for compliance to emphasize the
importance of these legal consumer protections. Likewise, FICUs are
already assumed to undertake the necessary due diligence to ensure a
borrower's ability to repay. For example, Appendix B currently requires
that a FICU's loan modification policy ``must also ensure credit unions
make loan workout decisions based on the borrower's renewed willingness
and ability to repay the loan.'' \8\ The Board also notes that the rule
does not prescribe a specific method for making this determination,
thereby providing credit unions with a large degree of flexibility in
meeting the requirement. The rule requires only that FICUs maintain
documentation reflecting how the determination was made.
---------------------------------------------------------------------------
\8\ See 12 CFR part 741, Appendix B, section captioned ``Written
Loan Workout Policy and Monitoring Requirements.''
---------------------------------------------------------------------------
Comment: Prohibition on Advancing Credit Union Fees and
Commissions. Seventeen commenters responded to question 6 regarding
whether NCUA should lift the current prohibition on the capitalization
of credit union fees and commissions.
The commenters in support of maintaining the prohibition stated
that they did not deem it necessary to charge such fees or feel that it
was appropriate to charge internal fees to members who are struggling.
They noted that continuing to prohibit the practice is an important
consumer protection. One of the commenters stated that in the event the
NCUA did decide to authorize the capitalization of credit union fees
and commissions, appropriate limitations should be put in place,
without which the potential for predatory behavior and risk to the
member-borrower may be heightened.
Two commenters in support of removing the prohibition stated that
FICUs should have the ability to charge reasonable modification fees so
long as those fees are disclosed. One stated that FICUs have an
incentive to not overburden the member with excessive workout-related
fees to help the member repay the loan. Another commenter stated that
if the NCUA chose not to allow all FICU fees to be capitalized, it
should consider allowing the capitalization of fees up to a certain
level. Another stated that for consumer protection purposes any fees
charged for a modification involving interest capitalization should not
be commissionable and that fees should be limited to actual costs
incurred.
One FCU commenter stated that its mortgage modifications are
handled by a third-party service provider which charges a fee for each
modification. If the fee cannot be capitalized and the borrower cannot
afford to pay it as a direct charge, the FCU's only alternatives are to
deny the modification or absorb the cost. This commenter was the only
one to provide some data regarding the actual cost of modification
fees. Prior to 2012, when interest capitalization was permitted, the
cost to this FCU for the modification of 170 mortgage loans would have
been approximately $42,500. If the cost to the FCU of managing the
program and operating its loan system were included, the cost more than
doubled. The FCU further noted that the fees are the reimbursement of
costs and not a revenue generation opportunity.
NCUA Response. Having reviewed the comments, the Board is not
persuaded that FICUs should be permitted to capitalize credit union
fees and commissions at this time. Most commenters advocating for the
change did not include any discussion of how borrowers would be
protected from excessive fees or supply any data on the actual cost to
FICUs of providing loan workouts with interest capitalization. The
final rule continues to permit FICUs to make advances covering third-
party fees, such as force-placed insurance or property taxes. The
Board, however, continues to believe that the current restrictions on
fee reimbursement have provided a level of protection for borrowers in
distress. The Board agrees with the comment that it would be contrary
to the purposes of the credit union system to capitalize internally
generated fees and commissions in a time of economic stress.
Accordingly, credit union fees and commissions must be paid directly by
the borrower at the time of the modification and not added to the loan
balance.
C. Other Issues Raised by Commenters
Comment: Federal Preemption of State Consumer Protection Laws. Two
commenters raised state preemption issues. Both commenters asked the
NCUA to clarify that the proposed rule's requirement that all FICUs
follow applicable state consumer protection laws does not override its
regulation preempting state law on issues
[[Page 34615]]
pertaining to ``terms of repayment'' (12 CFR 701.21(b)(1)(ii)(B)). Both
commenters noted that some states prohibit the charging of interest on
interest which if not preempted will dampen the effectiveness of NCUA's
proposed rule.
NCUA Response: As an initial matter, the NCUA notes that the part
701 regulations, including Sec. 701.21, generally apply solely to
FCUs. Federally insured, state-chartered credit unions (FISCUs) must
follow any requirements established by their State regarding the terms
of repayment.\9\ With respect to FCUs, this final rule does not in any
way amend the regulation regarding the relationship between State law
and the NCUA's regulations on loans made to members and lines of credit
(12 CFR 701.21). The Board 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.
---------------------------------------------------------------------------
\9\ As provided in Sec. 701.21(a), certain provisions of Sec.
701.21 apply to FISCUs as specified in Sec. 741.23; however, the
part 741 provision does not make Sec. 701.21(b)(1)(ii)(B)
applicable to FISCUs.
---------------------------------------------------------------------------
Comment: Retroactive Applicability. Two commenters asked that the
NCUA apply the rule retroactively. One stated that NCUA should make
January 1, 2020, the effective date to fully capture the economic
disruption caused by the pandemic. The other commenter stated that in
the interests of fairness if a credit union has already been
capitalizing interest on loans without receiving an examination finding
or Document of Resolution (DOR),\10\ then examiners should not take
corrective action for these practices once the rule is finalized.
---------------------------------------------------------------------------
\10\ See generally the NCUA Examiner's Guide, for more
information regarding the agency's examination process, including
examination findings and DORs. The Guide is available at: https://publishedguides.ncua.gov/examiner/Pages/default.htm#ExaminersGuide/Home.htm%3FTocPath%3D_1.
---------------------------------------------------------------------------
NCUA Response. The Board has not revised the rule in response to
these comments. The Board notes that, as a legal matter, agencies may
not generally adopt retroactive rules without explicit congressional
authorization.\11\ Accordingly, this final rule will apply
prospectively upon issuance. The Board, however, is cognizant of the
extraordinary nature of the COVID-19 pandemic, and the resulting
stresses that have been placed on FICUs and their members. In their
June 2020 interagency examiner guidance, the NCUA and the other banking
agencies noted that loan modifications are ``positive actions that can
mitigate adverse effects on borrowers due to the pandemic.'' \12\ The
interagency guidance specifies that ``[e]xaminers will not criticize
institutions for working with borrowers as part of a risk mitigation
strategy intended to improve existing loans, even if the restructured
loans have or develop weaknesses that ultimately result in adverse
credit classification.'' \13\ The NCUA will take into account the
interagency examiner guidance in assessing any loan modification
actions taken by credit unions, including interest capitalization,
prior to the effective date of this final rule.
---------------------------------------------------------------------------
\11\ Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988).
\12\ Interagency Examiner Guidance for Assessing Safety and
Soundness Considering the Effect of the COVID-19 Pandemic on
Institutions (June 2020), page 6, available at https://www.ncua.gov/files/press-releases-news/examiner-guidance-covid19-effect.pdf.
\13\ Id.
---------------------------------------------------------------------------
Comment: Troubled Debt Restructuring. One commenter stated that the
NCUA should emphasize, either in the regulation or in supervisory
guidance, the importance of a FICU update to its troubled debt
restructuring (TDR) policy because a TDR policy that harmonizes
interest capitalization and other accounting tools is essential if
NCUA's proposed rule is to achieve its full, intended effect.
NCUA Response. The Board appreciates this comment and agrees that
FICUs should update their TDR policies as necessary to maintain
consistency with applicable requirements. TDRs are a concept found in
generally accepted accounting principles (GAAP),\14\ which FICUs are
generally required to follow pursuant to section 202 of the FCU
Act.\15\ The NCUA and the other banking agencies most recently issued
guidance regarding TDRs on April 7, 2020. The April 7, 2020,
interagency statement is designed to assist financial institutions that
are working with borrowers affected by COVID-19.\16\ The NCUA is not
revising any TDR requirements through this rulemaking.
---------------------------------------------------------------------------
\14\ See Federal Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 310-40, Receivables--Troubled Debt
Restructurings by Creditors, available at https://asc.fasb.org/subtopic&trid=2196892.
\15\ See section 202(b)(6)(C)(i) of the Federal Credit Union Act
(12 U.S.C. 1782(b)(6)(C)(i)).
\16\ Interagency Statement on Loan Modifications and Reporting
for Financial Institutions Working with Customers Affected by the
Coronavirus (Revised) (April 7, 2020), available at: https://www.ncua.gov/files/press-releases-news/interagency-statement-tdr-policy-revised.pdf.
---------------------------------------------------------------------------
IV. This Final Rule
A. Capitalization of Interest
The Board is amending Appendix B to remove the prohibition on the
capitalization of interest in connection with loan workouts and
modifications. As noted, the change applies to workouts of all types of
member loans, including commercial and business loans. The NCUA also
notes that--consistent with the scope of Appendix B--the regulatory
amendments made by this final rule apply only to loan modifications
involving the capitalization of interest. The final rule does not
address the capitalization of interest that may occur in other
contexts. The Board notes that banks frequently include interest
capitalization as one of several components in a loan restructuring to
mutually benefit the lender and the borrower. The Board expects that
FICUs will follow suit, and provide borrowers with the option to
capitalize interest along with other loan modification options, such as
the lowering of loan payments or the interest rate, extending the
maturity date, partial principal or interest forgiveness and other
modifications.
The final rule adds a definition of capitalized interest to the
Glossary of Appendix B. For the purposes of this rulemaking,
capitalization of interest constitutes the addition of accrued but
unpaid interest to the principal balance of a loan.
The final rule continues to provide that a FICU may not, under any
event, authorize additional advances to finance credit union fees and
commissions. FICUs 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. The Board believes that maintaining the
prohibition on the capitalization of credit union fees is an important
consumer protection feature of the rule for member borrowers.
The Board underscores that it is maintaining several requirements
that apply to all loan workout policies in Appendix B. For example, the
Appendix establishes the expectation that loan workouts will consider
and balance the best interests of the FICU and the borrower, including
consumer financial protection measures. Ensuring the best interest of
the borrower prohibits predatory lending practices such as including
loan terms that result in negative amortization. In addition, a FICU's
policy must establish limits on
[[Page 34616]]
the number of modifications allowed for an individual loan. Further,
the policy must ensure that a FICU make loan workout decisions based on
a borrower's renewed willingness and ability to repay the loan.
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. The current Appendix also sets forth several
supervisory expectations relating to multiple restructurings, stating
that examiners will request validation documentation regarding
collectability if a FICU engages in multiple restructurings of a loan.
The current Appendix also requires that a FICU maintain sufficient
documentation to demonstrate that the FICU's personnel communicated the
new terms with the borrower, that the borrower agreed to pay the loan
in full under the new terms and, most importantly, the borrower has the
ability to repay the loan under the new terms.
These requirements and expectations, which currently apply to
FICUs' loan workout policies, will apply equally if a FICU adopts a
practice of capitalizing interest in connection with loan workouts. In
addition, in light of the potential for interest capitalization to have
a detrimental effect on borrowers if executed inappropriately, and to
mask the true financial status of a loan and a credit union's financial
statements, the Board is adding requirements to the Appendix to apply
to FICUs that engage in this practice.
Modifications of loans that result in capitalization of unpaid
interest are appropriate only when the borrower has the ability to
repay the debt in accordance with the modification. At a minimum, if a
FICU's loan modification policy permits capitalization of unpaid
interest, the policy must require each of the following:
1. Compliance with all applicable consumer protection laws and
regulations, including, but not limited to, the Equal Credit
Opportunity Act, the Fair Housing Act, the Truth In Lending Act, the
Real Estate Settlement Procedures Act, the Fair Credit Reporting Act,
and the prohibitions against the use of unfair, deceptive or abusive
acts or practices contained in the Consumer Financial Protection Act of
2010. (The Board notes that FICUs are also expected to comply with
applicable State consumer protection laws that, in some instances, may
be more stringent than Federal law, prohibiting, for example, the
charging of interest on interest, subject to any case-by-case Federal
preemption determinations that may be appropriate.)
2. Documentation that reflects a borrower's ability to repay, a
borrower's source(s) of repayment, and when appropriate, compliance
with the FICU's valuation policies at the time the modification is
approved.
3. Providing borrowers with documentation that is accurate, clear,
and conspicuous and consistent with Federal and state consumer
protection laws.
4. Appropriate reporting of loan status for modified loans in
accordance with applicable law and accounting practices. The FICU shall
not report a modified loan as past due if the loan was current prior to
modification and the borrower is complying with the terms of the
modification.
5. Prudent policies and procedures to help borrowers resume
affordable and sustainable repayments that are appropriately
structured, while at the same time minimizing losses to the credit
union. The prudent policies and procedures must consider:
i. Whether the loan modifications are well-designed, consistently
applied, and provide a favorable outcome for borrowers.
ii. The available options for borrowers to repay any missed
payments at the end of their modifications to avoid delinquencies or
other adverse consequences.
6. Appropriate safety and soundness safeguards to prevent the
following:
i. Masking deteriorations in loan portfolio quality and
understating charge-off levels;
ii. Delaying loss recognition resulting in an understated allowance
for loan and lease losses account or inaccurate loan valuations;
iii. Overstating net income and net worth (regulatory capital)
levels; and
iv. Circumventing internal controls.
B. Technical Updates to Appendix B
The Board also took this opportunity to propose several technical
changes to Appendix B to improve its clarity and update certain
references. No commenters opposed these changes, and the Board is
adopting them as proposed.
For example, the final rule updates references to the NCUA's or
other guidance in the Appendix, such as guidance or standards issued by
other federal banking agencies or the Financial Accounting Standards
Board (FASB). These changes are intended to provide current
information, and are not substantive policy changes.
In May 2014, FASB issued an accounting standard update for revenue
recognition (ASU 2014-09) which replaced the cost recovery method of
income recognition in ASC 605-10-25-4 with transition guidance found in
ASC 606--Revenue from Contracts with Customers. The (2012) Appendix
made reference to the cost recovery method of income recognition with
citation in the Glossary. As this has been superseded by ASC 606, the
Board has eliminated this reference in the Appendix and emphasizes that
accrual of interest income ceases on a financial asset when full
payment of principal and interest in cash is not expected.
In addition, to conform to the terminology that the Board adopted
in 2016 in amending part 723,\17\ the final rule updates references to
member business loans to also refer to commercial loans. These changes
are not intended to create new requirements or standards.
---------------------------------------------------------------------------
\17\ 81 FR 13530 (Mar. 14, 2016) (https://www.govinfo.gov/content/pkg/FR-2016-03-14/pdf/2016-03955.pdf).
---------------------------------------------------------------------------
The final rule also makes terminology in the Appendix consistent
with its purpose. The Appendix sets forth requirements for FICU
policies relating to loan workouts, TDRs, and nonaccrual status. In
several instances, the current Appendix uses the word ``should'' when
referring to necessary elements of a FICU's policies or refers to the
Appendix as ``guidance'' or an interpretive ruling and policy
statement. To make the purpose and effect of the Appendix clearer, the
final rule uses mandatory language where appropriate and eliminates
references to the Appendix as ``guidance.''
Finally, the Board clarified several statements of the Appendix to
make it more consistent with plain language principles.
None of these changes were substantive and were outlined for
commenters in a redlined copy of the Appendix that the agency made
available in the rulemaking docket.
V. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities.\18\ For purposes of
this analysis, the NCUA considers small credit unions to be those
having under $100 million in assets.\19\ The final rule allows FICUs to
capitalize unpaid interest when working with borrowers. The final rule
[[Page 34617]]
is not expected to increase the cost burden for FICUs. Accordingly, the
NCUA certifies that the final rule will not have a significant economic
impact on a substantial number of small credit unions.
---------------------------------------------------------------------------
\18\ 5 U.S.C. 603(a).
\19\ 80 FR 57512 (Sept. 24, 2015) (https://www.govinfo.gov/content/pkg/FR-2015-09-24/pdf/2015-24165.pdf).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires that the Office of Management and Budget (OMB) approve all
collections of information by a Federal agency from the public before
they can be implemented. Respondents are not required to respond to any
collection of information unless it displays a valid OMB control
number. In accordance with the PRA, the information collection
requirements included in this final rule have been submitted to OMB for
approval under control number 3133-0092.
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order. This rulemaking will not
have a substantial direct effect on the states, on the connection
between the National Government and the states, or on the distribution
of power and responsibilities among the various levels of government.
The NCUA has determined that this final rule does not constitute a
policy that has federalism implications for purposes of the executive
order.
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule will not affect family
well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, 1999.\20\
---------------------------------------------------------------------------
\20\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------
E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) \21\ generally provides for congressional review of agency
rules. A reporting requirement is triggered in instances where the NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act. An agency rule, in addition to being subject to
congressional oversight, may also be subject to a delayed effective
date if the rule is a ``major rule.'' The NCUA does not believe this
rule is a ``major rule'' within the meaning of the relevant sections of
SBREFA. As required by SBREFA, the NCUA will submit this final rule to
OMB for it to determine if the final rule is a ``major rule'' for
purposes of SBREFA. The NCUA also will file appropriate reports with
Congress and the Government Accountability Office so this rule may be
reviewed.
---------------------------------------------------------------------------
\21\ 5 U.S.C. 551.
---------------------------------------------------------------------------
List of Subjects in 12 CFR Part 741
Credit, Credit unions, Share insurance.
By the National Credit Union Administration Board on June 24,
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the Board amends 12 CFR
part 741 as follows:
PART 741--REQUIREMENTS FOR INSURANCE
0
1. The authority citation for part 741 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
0
2. Appendix B to Part 741 is revised to read as follows:
Appendix B to Part 741--Loan Workouts, Nonaccrual Policy, and
Regulatory Reporting of Troubled Debt Restructured Loans
This Appendix establishes requirements for the management of
loan workout \1\ arrangements, loan nonaccrual, and regulatory
reporting of troubled debt restructured loans (herein after referred
to as TDR or TDRs). This Appendix applies to all federally insured
credit unions.
---------------------------------------------------------------------------
\1\ Terms defined in the Glossary will be italicized on their
first use in the body of this =Appendix.
---------------------------------------------------------------------------
Under this Appendix, TDRs are as defined in generally accepted
accounting principles (GAAP), and the Board does not intend to
change the Financial Accounting Standards Board's (FASB) definition
of TDR in any way through this policy. In addition to existing
agency policy, this Appendix sets the NCUA's supervisory
expectations governing loan workout policies and practices and loan
accruals.
Written Loan Workout Policy and Monitoring Requirements \2\
---------------------------------------------------------------------------
\2\ For additional guidance on commercial and member business
lending extension, deferral, renewal, and rewrite policies, see
Interagency Policy Statement on Prudent Commercial Real Estate Loan
Workouts (October 30, 2009) transmitted by Letter to Credit Unions
No. 10-CU-07, and available at http://www.ncua.gov.
---------------------------------------------------------------------------
For purposes of this Appendix, types of workout loans to
borrowers in financial difficulties include re-agings, extensions,
deferrals, renewals, or rewrites. See the Glossary entry on workouts
for further descriptions of each term. Borrower retention programs
or new loans are not encompassed within this policy nor considered
by the Board to be workout loans.
A credit union can use loan workouts to help borrowers overcome
temporary financial difficulties such as loss of job, medical
emergency, or change in family circumstances such as the loss of a
family member. Loan workout arrangements must consider and balance
the best interests of both the borrower and the credit union.
The lack of a sound written policy on workouts can mask the true
performance and past due status of the loan portfolio. Accordingly,
the credit union board and management must adopt and adhere to an
explicit written policy and standards that control the use of loan
workouts, and establish controls to ensure the policy is
consistently applied. The loan workout policy and practices should
be commensurate with a credit union's size and complexity, and must
conform with a credit union's broader risk mitigation strategies.
The policy must define eligibility requirements (that is, under what
conditions the credit union will consider a loan workout), including
establishing limits on the number of times an individual loan may be
modified.\3\ The policy must also ensure credit unions make loan
workout decisions based on a borrower's renewed willingness and
ability to repay the loan. If a credit union 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. The
NCUA is concerned about restructuring activity that pushes existing
losses into future reporting periods without improving a loan's
collectability. One way a credit union can provide convincing
evidence that multiple restructurings improve collectability is to
validate completed multiple restructurings that substantiate the
claim. Examiners will ask for such validation documentation if a
credit union engages in multiple restructurings of a loan.
---------------------------------------------------------------------------
\3\ Broad based credit union programs commonly used as a member
benefit and implemented in a safe and sound manner limited to only
accounts in good standing, such as Skip-a-Pay programs, are not
intended to count toward these limits.
---------------------------------------------------------------------------
In addition, the policy must establish sound controls to ensure
loan workout actions are appropriately structured.\4\ The
[[Page 34618]]
policy must explicitly prohibit the authorization of additional
advances to finance credit union fees and commissions. The credit
union may, however, make advances to cover third-party fees, such as
force-placed insurance or property taxes. For loan workouts granted,
a credit union must document the determination that the borrower is
willing and able to repay the loan.
---------------------------------------------------------------------------
\4\ In developing a written policy, the credit union board and
management may wish to consider similar parameters as those
established in the FFIEC's ``Uniform Retail Credit Classification
and Account Management Policy'' (FFIEC Policy). 65 FR 36903 (June
12, 2000) (https://www.govinfo.gov/content/pkg/FR-2000-06-12/pdf/00-14704.pdf). The FFIEC Policy sets forth specific limitations on the
number of times a loan can be re-aged (for open-end accounts) or
extended, deferred, renewed or rewritten (for closed-end accounts).
NCUA Letter to Credit Unions (LCU) 09-CU-19, ``Evaluating
Residential Real Estate Mortgage Loan Modification Programs,'' also
outlines policy best practices for real estate modifications
(https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/evaluating-residential-real-estate-mortgage-loan-modification-programs). Those best practices remain applicable to
real estate loan modifications (with the exception to the
capitalization of credit union fees) but could be adapted in part by
the credit union in their written loan workout policy for other
loans.
---------------------------------------------------------------------------
Modifications of loans that result in capitalization of unpaid
interest are appropriate only when a borrower has the ability to
repay the debt. At a minimum, if a FICU's loan modification policy
permits capitalization of unpaid interest, the policy must require:
1. Compliance with all applicable federal and state consumer
protection laws and regulations, including, but not limited to, the
Equal Credit Opportunity Act, the Fair Housing Act, the Truth In
Lending Act, the Real Estate Settlement Procedures Act, the Fair
Credit Reporting Act, and the prohibitions against the use of
unfair, deceptive or abusive acts or practices in the Consumer
Financial Protection Act of 2010.
2. Documentation that reflects a borrower's ability to repay, a
borrower's source(s) of repayment, and when appropriate, compliance
with the FICU's valuation policies at the time the modification is
approved.
3. Providing borrowers with written disclosures that are
accurate, clear and conspicuous and that are consistent with Federal
and state consumer protection laws.
4. Appropriate reporting of loan status for modified loans in
accordance with applicable law and accounting practices. The FICU
shall not report a modified loan as past due if the loan was current
prior to modification and the borrower is complying with the terms
of the modification.
5. Prudent policies and procedures to help borrowers resume
affordable and sustainable repayments that are appropriately
structured, while at the same time minimizing losses to the credit
union. The prudent policies and procedures must consider
i. Whether the loan modifications are well-designed,
consistently applied, and provide a favorable outcome for borrowers.
ii. The available options for borrowers to repay any missed
payments at the end of their modifications to avoid delinquencies or
other adverse consequences.
6. Appropriate safety and soundness safeguards to prevent the
following:
i. Masking deteriorations in loan portfolio quality and
understating charge-off levels; \5\
---------------------------------------------------------------------------
\5\ Refer to NCUA guidance on charge-offs set forth in LCU 03-
CU-01, ``Loan Charge-off Guidance,'' dated January 2003 (https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/loan-charge-guidance). Examiners will require that a
reasonable written charge-off policy is in place and that it is
consistently applied. Additionally, credit unions need to adjust
historical loss factors when calculating ALLL needs for pooled loans
to account for any loans with protracted charge-off timeframes (for
example, 12 months or more). See discussions on the latter point in
the 2006 Interagency ALLL Policy Statement transmitted by Accounting
Bulletin 06-1 (December 2006) (https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/interagency-advisory-addressing-alll-key-concepts-and-requirements). Upon
implementation of ASC 326--Financial Instruments--Credit Losses,
credit unions will use the guidance in Interagency Policy Statement
on Allowances for Credit Losses (May 2020) (https://www.ncua.gov/files/press-releases-news/policy-statement-allowances-credit-losses.pdf).
---------------------------------------------------------------------------
ii. Delaying loss recognition resulting in an understated
allowance for loan and lease losses account or inaccurate loan
valuations;
iii. Overstating net income and net worth (regulatory capital)
levels; and
iv. Circumventing internal controls.
The credit union's risk management framework must include
thresholds, based on aggregate volume of loan workout activity,
which trigger enhanced reporting to the board of directors. This
reporting will enable the credit union's board of directors to
evaluate the effectiveness of the credit union's loan workout
program, understand any implications to the organization's financial
condition, and make any compensating adjustments to the overall
business strategy. This information will also be available to
examiners upon request.
To be effective, management information systems need to track
the principal reductions and charge-off history of loans in workout
programs by type of program. Any decision to re-age, extend, defer,
renew, or rewrite a loan, like any other revision to contractual
terms, must be supported by the credit union's management
information systems. Sound management information systems identify
and document any loan that is re-aged, extended, deferred, renewed,
or rewritten, including the frequency and extent of such action.
Documentation normally shows that credit union personnel
communicated with the borrower, the borrower agreed to pay the loan
in full under any new terms, and the borrower has the ability to
repay the loan under any new terms.
Regulatory Reporting of Workout Loans Including TDR Past Due Status
Credit unions will calculate the past due status of all loans
consistent with loan contract terms, including amendments made to
loan terms through a formal restructure. Credit unions will report
delinquency on the Call Report consistent with this policy.\6\
---------------------------------------------------------------------------
\6\ Subsequent Call Reports and accompanying instructions will
reflect this policy, including focusing data collection on loans
meeting the definition of TDR under GAAP. In reporting TDRs on
regulatory reports, the data collections will include all TDRs that
meet the GAAP criteria for TDR reporting, without the application of
materiality threshold exclusions based on scoping or reporting
policy elections of credit union preparers or their auditors. Credit
unions should also refer to ASC Subtopic 310-40 when determining if
a restructuring of a debt constitutes a TDR.
---------------------------------------------------------------------------
Loan Nonaccrual Policy
Credit unions must recognize interest income appropriately.
Credit unions must place loans in nonaccrual status when doubt
exists as to full collection of principal and interest or the loan
has been in default for a period of 90 days or more. Upon placing a
loan in nonaccrual, a credit union must reverse or charge-off
previously accrued but uncollected interest. A nonaccrual loan may
be returned to accrual status when a credit union expects repayment
of the remaining contractual principal and interest or it is well
secured and in process of collection.\7\ This policy on loan accrual
is consistent with longstanding credit union industry practice as
implemented by the NCUA over the last several decades. The balance
of the policy relates to commercial and member business loan
workouts and is similar to the policies adopted by the federal
banking agencies \8\ as set forth in the FFIEC Call Report for
banking institutions and its instructions.\9\
---------------------------------------------------------------------------
\7\ Placing a loan in nonaccrual status does not change the loan
agreement or the obligations between the borrower and the credit
union. Only the parties can effect a restructuring of the original
loan terms or otherwise settle the debt.
\8\ The federal banking agencies are the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency.
\9\ FFIEC Report of Condition and Income Forms, Instructions and
Supplemental Instructions, https://www.ffiec.gov/forms041.htm.
---------------------------------------------------------------------------
Nonaccrual Status
Credit unions may not accrue interest \10\ on any loan where
principal or interest has been in default for a period of 90 days or
more unless the loan is both ``well secured'' and ``in the process
of collection.'' \11\ For purposes of applying the ``well secured''
and ``in process of collection'' test for nonaccrual status listed
above, the date on which a loan reaches nonaccrual status is
determined by its contractual terms.
---------------------------------------------------------------------------
\10\ Nonaccrual of interest also includes the amortization of
deferred net loan fees or costs, or the accretion of discount.
Nonaccrual of interest on loans past due 90 days or more is a
longstanding agency policy and credit union practice.
\11\ A purchased credit impaired loan asset need not be placed
in nonaccrual status as long as the criteria for accrual of income
under the interest method in GAAP is met. Also, the accrual of
interest on workout loans is covered in a later section of this
Appendix.
---------------------------------------------------------------------------
While a loan is in nonaccrual status, a credit union may treat
some or all of the cash payments received as interest income on a
cash basis provided no doubt exists about the collectability of the
remaining recorded investment in the loan. A credit union must
handle the reversal of previously accrued, but uncollected, interest
applicable to any loan placed in nonaccrual status in accordance
with GAAP.\12\
---------------------------------------------------------------------------
\12\ Acceptable accounting treatment includes a reversal of all
previously accrued, but uncollected, interest applicable to loans
placed in a nonaccrual status against appropriate income and balance
sheet accounts. For example, one acceptable method of accounting for
such uncollected interest on a loan placed in nonaccrual status is
to reverse all of the unpaid interest by crediting the ``accrued
interest receivable'' account on the balance sheet; to reverse the
uncollected interest that has been accrued during the calendar year-
to-date by debiting the appropriate ``interest and fee income on
loans'' account on the income statement, and to reverse any
uncollected interest that had been accrued during previous calendar
years by debiting the ``allowance for loan and lease losses''
account on the balance sheet. The use of this method presumes that
credit union management's additions to the allowance through charges
to the ``provision for loan and lease losses'' on the income
statement have been based on an evaluation of the collectability of
the loan and lease portfolios and the ``accrued interest
receivable'' account.
---------------------------------------------------------------------------
[[Page 34619]]
Restoration to Accrual Status for All Loans Except Commercial and
Member Business Loan Workouts
A nonaccrual loan may be restored to accrual status when:
Its past due status is less than 90 days and the credit
union expects repayment of the remaining contractual principal and
interest within a reasonable period;
It otherwise becomes both well secured and in the
process of collection; or
The asset is a purchased impaired loan and it meets the
criteria under GAAP for accrual of interest income under the
accretable yield method. See ASC 310-30.
In restoring all loans to accrual status, if the credit union
applied any interest payments received while the loan was in
nonaccrual status to reduce the recorded investment in the loan, the
credit union must not reverse the application of these payments to
the loan's recorded investment (and must not credit interest
income). Likewise, a credit union cannot restore the accrued but
uncollected interest reversed or charged-off at the point the loan
was placed on nonaccrual status to accrual; it can only be
recognized as income if collected in cash or cash equivalents from
the member.
Restoration to Accrual Status on Commercial and Member Business Loan
Workouts \13\
---------------------------------------------------------------------------
\13\ This policy is derived from the ``Interagency Policy
Statement on Prudent Commercial Real Estate Loan Workouts'' the NCUA
and the other financial regulators issued on October 30, 2009.
---------------------------------------------------------------------------
A formally restructured commercial or member business loan
workout need not be maintained in nonaccrual status, provided the
restructuring and any charge-off taken on the loan are supported by
a current, well-documented credit evaluation of the borrower's
financial condition and prospects for repayment under the revised
terms. Otherwise, the restructured loan must remain in nonaccrual
status.
The credit union's evaluation must include consideration of the
borrower's sustained historical repayment performance for a
reasonable period prior to the date on which the loan is returned to
accrual status. A sustained period of repayment performance is a
minimum of six consecutive payments, and includes timely payments
under the restructured loan's terms of principal and interest in
cash or cash equivalents. In returning the commercial or member
business workout loan to accrual status, a credit union may consider
sustained historical repayment performance for a reasonable time
prior to the restructuring. Such a restructuring must improve the
collectability of the loan in accordance with a reasonable repayment
schedule and does not relieve the credit union from the
responsibility to promptly charge off all identified losses.
The following graph provides an example of a schedule of
repayment performance to demonstrate a determination of six
consecutive payments. If the original loan terms required a monthly
payment of $1,500, and the credit union lowered the borrower's
payment to $1,000 through formal commercial or member business loan
restructure, then based on the first row of the graph, the
``sustained historical repayment performance for a reasonable time
prior to the restructuring'' would encompass five of the pre-workout
consecutive payments that were at least $1,000 (months 1 through 5).
In total, the six consecutive repayment burden would be met by the
first month post workout (month 6).
In the second row, only one of the pre-workout payments would
count toward the six consecutive repayment requirement (month 5),
because it is the first month in which the borrower made a payment
of at least $1,000 after failing to pay at least that amount.
Therefore, the loan would remain on nonaccrual for at least five
post-workout consecutive payments (months 6 through 10) provided the
borrower continues to make payments consistent with the restructured
terms.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Pre-workout Post-workout
--------------------------------------------------------------------------------------------------------------------------------------------------------
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
$1,500 $1,200 $1,200 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
1,500 1,200 900 875 1,000 1,000 1,000 1,000 1,000 1,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
After a formal restructure of a commercial or member business
loan, if the restructured loan has been returned to accrual status,
the loan otherwise remains subject to the nonaccrual standards of
this policy. If any interest payments received while the commercial
or member business loan was in nonaccrual status were applied to
reduce the recorded investment in the loan the application of these
payments to the loan's recorded investment must not be reversed (and
interest income must not be credited). Likewise, accrued but
uncollected interest reversed or charged-off at the point the
commercial or member business workout loan was placed on nonaccrual
status cannot be restored to accrual; it can only be recognized as
income if collected in cash or cash equivalents from the member.
The following tables summarize nonaccrual and restoration to
accrual requirements previously discussed:
Table 1--Nonaccrual Criteria
----------------------------------------------------------------------------------------------------------------
Action Condition identified Additional consideration
----------------------------------------------------------------------------------------------------------------
Nonaccrual on All Loans.............. 90 days or more past due unless loan is See Glossary definitions for
both well-secured and in the process of ``well secured'' and ``in
collection; or the process of collection.''
The loan is maintained on the Cash basis
because there is a deterioration in the
financial condition of the borrower, or
for which payment in full of principal or
interest is not expected.
Nonaccrual on Commercial or Member Continue on nonaccrual at workout point See Table 2--Restore to
Business Loan Workouts. and until restore to accrual criteria are Accrual.
met.
----------------------------------------------------------------------------------------------------------------
[[Page 34620]]
Table 2--Restore to Accrual
----------------------------------------------------------------------------------------------------------------
Action Condition identified Additional consideration
----------------------------------------------------------------------------------------------------------------
Restore to Accrual on All Loans When a loan is less than 90 days past due See Glossary definitions for
except Commercial or Member Business and the credit union expects repayment of ``well secured'' and ``in
Loan Workouts. the remaining contractual principal and the process of collection.''
interest within a reasonable period, or Interest payments received
When it otherwise becomes both ``well while the loan was in
secured'' and ``in the process of nonaccrual status and
collection''; or applied to reduce the
The asset is a purchased impaired loan and recorded investment in the
it meets the criteria under GAAP (see ASC loan must not be reversed
310-30) for accrual of interest income and income credited.
under the accretable yield method. Likewise, accrued but
uncollected interest
reversed or charged-off at
the point the loan was
placed on nonaccrual status
cannot be restored to
accrual.
Restore to Accrual on Commercial or Formal restructure with a current, well The evaluation must include
Member Business Loan Workouts. documented credit evaluation of the consideration of the
borrower's financial condition and borrower's sustained
prospects for repayment under the revised historical repayment
terms. performance for a minimum of
six timely consecutive
payments comprised of
principal and interest. In
returning a loan to accrual
status, a credit union may
take into account sustained
historical repayment
performance for a reasonable
time prior to the
restructured terms. Interest
payments received while the
commercial or member
business loan was in
nonaccrual status and
applied to reduce the
recorded investment in the
loan must not be reversed
and income credited.
Accrued but uncollected
interest reversed or charged-
off at the point the
commercial or member
business loan was placed on
nonaccrual status cannot be
restored to accrual.
----------------------------------------------------------------------------------------------------------------
Glossary 14
``Capitalization of Interest'' constitutes the addition of
accrued but unpaid interest to the principal balance of a loan.
---------------------------------------------------------------------------
\14\ Terms defined in the Glossary will be italicized on their
first use in the body of this guidance.
---------------------------------------------------------------------------
``Cash Basis'' method of income recognition is set forth in GAAP
and means while a loan is in nonaccrual status, some or all of the
cash interest payments received may be treated as interest income on
a cash basis provided no doubt exists about the collectability of
the remaining recorded investment in the loan.\15\
---------------------------------------------------------------------------
\15\ Acceptable accounting practices include allocating
contractual interest payments among interest income, reduction of
the recorded investment in the asset, and recovery of prior charge-
offs. If this method is used, the amount of income that is
recognized would be equal to that which would have been accrued on
the loan's remaining recorded investment at the contractual rate;
and, accounting for the contractual interest in its entirety either
as income, reduction of the recorded investment in the asset, or
recovery of prior charge-offs, depending on the condition of the
asset, consistent with its accounting policies for other financial
reporting purposes.
---------------------------------------------------------------------------
``Charge-off'' means a direct reduction (credit) to the carrying
amount of a loan carried at amortized cost resulting from
uncollectability with a corresponding reduction (debit) of the ALLL.
Recoveries of loans previously charged off must be recorded when
received.
``Commercial Loan'' is defined consistent with Section 723.2 of
the NCUA's MEMBER BUSINESS LOANS; COMMERCIAL LENDING Rule, 12 CFR
723.2.
``Generally accepted accounting principles (GAAP)'' means
official pronouncements of the FASB as memorialized in the FASB
Accounting Standards Codification[supreg] as the source of
authoritative principles and standards recognized to be applied in
the preparation of financial statements by federally insured credit
unions in the United States with assets of $10 million or more.
``In the process of collection'' means collection of the loan is
proceeding in due course either:
(1) Through legal action, including judgment enforcement
procedures, or
(2) In appropriate circumstances, through collection efforts not
involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to a current status in
the near future, i.e., generally within the next 90 days.
``Member Business Loan'' is defined consistent with Sec. 723.8
of the NCUA's MEMBER BUSINESS LOANS; COMMERCIAL LENDING Rule, 12 CFR
723.8.
``New Loan'' means the terms of the revised loan are at least as
favorable to the credit union (i.e., terms are market-based, and
profit driven) as the terms for comparable loans to other customers
with similar collection risks who are not refinancing or
restructuring a loan with the credit union, and the revisions to the
original debt are more than minor.
``Past Due'' means a loan is determined to be delinquent in
relation to its contractual repayment terms including formal
restructures, and must consider the time value of money. Credit
unions may use the following method to recognize partial payments on
``consumer credit,'' i.e., credit extended to individuals for
household, family, and other personal expenditures, including credit
cards, and loans to individuals secured by their personal residence,
including home equity and home improvement loans. A payment
equivalent to 90 percent or more of the contractual payment may be
considered a full payment in computing past due status.
``Recorded Investment in a Loan'' means the loan balance
adjusted for any unamortized premium or discount and unamortized
loan fees or costs, less any amount previously charged off, plus
recorded accrued interest.
``Troubled Debt Restructuring'' is as defined in GAAP and means
a restructuring in which a credit union, for economic or legal
reasons related to a member borrower's financial difficulties,
grants a concession to the borrower that it would not otherwise
consider.\16\ The restructuring of a loan may include, but is not
necessarily limited to:
---------------------------------------------------------------------------
\16\ FASB ASC 310-40, ``Troubled Debt Restructuring by
Creditors.''
---------------------------------------------------------------------------
(1) The transfer from the borrower to the credit union of real
estate, receivables from third parties, other assets, or an equity
interest in the borrower in full or partial satisfaction of the
loan,
(2) A modification of the loan terms, such as a reduction of the
stated interest rate, principal, or accrued interest or an extension
of the maturity date at a stated interest rate lower than the
current market rate for new debt with similar risk, or
(3) A combination of the above.
A loan extended or renewed at a stated interest rate equal to
the current market interest rate for new debt with similar risk is
not to be reported as a restructured troubled loan.
``Well secured'' means the loan is collateralized by: (1) A
perfected security interest in, or pledges of, real or personal
property, including securities with an estimable value, less cost to
sell, sufficient to recover the recorded investment in the loan, as
well as a reasonable return on that amount, or (2) by the guarantee
of a financially responsible party.
[[Page 34621]]
``Workout Loan'' means a loan to a borrower in financial
difficulty that has been formally restructured so as to be
reasonably assured of repayment (of principal and interest) and of
performance according to its restructured terms. A workout loan
typically involves a re-aging, extension, deferral, renewal, or
rewrite of a loan.\17\ For purposes of this policy statement,
workouts do not include loans made to market rates and terms such as
refinances, borrower retention actions, or new loans.\18\
---------------------------------------------------------------------------
\17\ ``Re-Age'' means returning a past due account to current
status without collecting the total amount of principal, interest,
and fees that are contractually due.
\18\ There may be instances where a workout loan is not a TDR
even though the borrower is experiencing financial hardship. For
example, a workout loan would not be a TDR if the fair value of cash
or other assets accepted by a credit union from a borrower in full
satisfaction of its receivable is at least equal to the credit
union's recorded investment in the loan, e.g., due to charge-offs.
---------------------------------------------------------------------------
``Extension'' means extending monthly payments on a closed-end
loan and rolling back the maturity by the number of months extended.
The account is shown current upon granting the extension. If
extension fees are assessed, they must be collected at the time of
the extension and not added to the balance of the loan.
``Deferral'' means deferring a contractually due payment on a
closed-end loan without affecting the other terms, including
maturity, of the loan. The account is shown current upon granting
the deferral.
``Renewal'' means underwriting a matured, closed-end loan
generally at its outstanding principal amount and on similar terms.
``Rewrite'' means significantly changing the terms of an
existing loan, including payment amounts, interest rates,
amortization schedules, or its final maturity.
[FR Doc. 2021-13906 Filed 6-29-21; 8:45 am]
BILLING CODE 7535-01-P
