NCUA Board Member Todd M. Harper Statement on the Capitalization of Interest Notice of Proposed Rulemaking

As Prepared for Delivery on November 19, 2020

Thank you, Chairman Hood, and thank you, Scott and Joe, for your presentation on the capitalization of interest notice of proposed rulemaking. And, thank you, Ariel, Gira, Alison and Myra, for all of your work on this proposal. Through that hard work and cross-agency collaboration, you have created a better, more consumer-friendly proposal for the Board to consider today. For that, I am very appreciative.

At its core, this proposal is really about parity, clarity and consumer financial protection. Specifically, this proposal would give credit unions parity with banks on the treatment of capitalized of interest. In addition, the Federal Housing Administration, Fannie Mae and Freddie Mac permit the capitalization of interest, as did the HAMP program, temporarily put in place during the last financial crisis.

This proposal would also provide clarity by adjusting some inconsistencies in the NCUA’s regulations. And, this proposal would guarantee that members’ interests are safeguarded by striking the right balance between consumer financial protection and safety and soundness. I will support issuing this proposed rule for public comment because of this parity, clarity and consumer financial protection.

It is important to note that today’s action is just the latest in a series that the NCUA Board has taken to address the challenges that credit unions and their members face as our country navigates a pandemic-induced economic crisis. Consumers, who find themselves facing difficult times, have been provided forbearance on their mortgage payments through the Coronavirus Aid, Relief and Economic Security Act and by some states and localities. And, some financial institutions have proactively and voluntarily offered similar relief.

This proposal on the capitalization of interest seeks to mitigate the potential financial challenges that consumers and credit unions will face when these forbearance periods end. Specifically, the proposal would remove the prohibition on credit unions from capitalizing interest on loan modifications, while maintaining the important prohibition on a credit union capitalizing credit union fees and commissions. Advancing interest, coupled with other loan modification options that are beneficial to the consumer, may avert the need for other actions that would be more harmful to borrowers and costly to credit unions.

For borrowers experiencing financial hardship, a prudently underwritten and appropriately managed loan modification, consistent with safe-and-sound lending practices and consumer financial protection laws, is generally in the long-term best interest of both the borrower and the credit union. Such modifications may allow borrowers to remain in their homes, as well as help to minimize the costs of default and foreclosure for the credit union. It is the NCUA Board’s expectation that federally insured credit unions provide capitalization of interest as only one of several components in any loan modification — such as extending the term or the loan and lowering the interest rate — that are designed to help the borrower resume affordable and sustainable payments.

Additionally, the proposed rule would establish documentation requirements to ensure that the addition of unpaid interest to the principal balance of a mortgage loan would not hinder the borrower’s ability to become current on the loan. The proposed change would apply to workouts of all types of member loans, including commercial and business loans.

I would also like to take a moment to thank Chairman Hood and Board Member McWatters for agreeing to include several consumer protection measures I requested in the final version of the proposal. In my view, it is important to underscore that the “best interest of the borrower” prohibits predatory lending practices, such as terms with negative amortizations. I appreciate having this idea plainly spelled out in the proposal.

And, in those cases, where state law applies and it is more stringent, the NCUA Board expects credit unions to comply with state consumer financial protection laws. In other words, this rulemaking should be viewed as a regulatory floor, not a ceiling.

Overall, the additional consumer guardrails — which include assessing a consumers’ ability to repay, providing consumers with the appropriate disclosures on the cost of the loan modification, making sure that any workouts are based on affordable and sustainable payments, and limiting the number of loan modifications — moved this proposal in the right direction to gain my support.

In closing, I encourage all stakeholders to review this proposal and provide their comments within the 60-day comment period. Our rulemaking process is made stronger when we receive a diversity of views, including the comments of lenders, consumer advocates, trade groups and other interested parties.