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NCUA Chairman Todd M. Harper Statement on the Capitalization of Interest Final Rule

June 2021
NCUA Chairman Todd M. Harper Statement on the Capitalization of Interest Final Rule
Todd M. Harper

NCUA Chairman Todd M. Harper

As Prepared for Delivery on June 24, 2021

Thank you, Myra, Joe, and Gira for your efforts to finalize the capitalization of interest rule, which the NCUA Board is considering today. I would also like to thank Ariel, Alison, Matt, Martha, and the many others on the NCUA staff for their work on this matter. This rulemaking has been a team project. Through hard work and cross-agency collaboration, we have developed a well-crafted final rule that protects members and provides credit unions with needed flexibility.

This rule is another targeted measure by the NCUA Board aimed at helping credit unions and their members navigate the COVID-19 pandemic’s economic environment. The final rule will also give credit unions parity with banks, Fannie Mae, Freddie Mac, and the Federal Housing Administration, all of which already allow servicers to capitalize interest as part of a prudent modification program.

The clouds of the pandemic appear to be lifting at this time, and we are starting to see the green shoots of an economic recovery taking root. Credit unions have generally weathered the pandemic fairly well and reported strong net income, steady loan growth, and lower delinquency rates in the first quarter of this year. I must caution everyone, however, that we are not entirely out of the woods of the pandemic’s financial and economic disruptions just yet.

For more than a year, several government stimulus programs and interventions have saved the economy from a more severe contraction. But, many of these initiatives are now starting to end. Only when these programs expire will we know the pandemic’s actual effects on consumers’ personal finances and credit union balance sheets.

One thing that we do know is that expiring unemployment benefits, mortgage forbearance programs, and eviction moratoriums, along with slow job growth, will cause many households to experience financial stress in the months ahead. This is especially true for low-income individuals and communities of color, which were disproportionately affected by the pandemic and the resulting recession. A personal finance storm could lie ahead for many, and credit unions need to have appropriate tools to support their members.

For borrowers experiencing financial hardship, a prudently underwritten and appropriately managed loan modification, consistent with consumer financial protection laws and safe-and-sound lending practices, is generally in the long-term best interest of both the borrower and a credit union. Such modifications may allow borrowers to remain in their homes and help to minimize the costs of default and foreclosure for both the credit union and its member. 

That is what makes this final rule on the capitalization of interest such an important measure. Specifically, the final rule 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. It also establishes ability-to-repay requirements to ensure that the addition of unpaid interest to the principal balance of a mortgage loan will not hinder the borrower’s ability to make payments or become current on the loan. These measures would apply to workouts of all types of member loans, including commercial and business loans.

As I noted when this rule was first proposed, the NCUA Board expects that federally insured credit unions provide capitalization of interest as only one of several components in any loan modification — such as extending the term of the loan or lowering the interest rate — which are designed to help borrowers resume affordable and sustainable payments. In other words, capitalization of interest is one potential ingredient in the recipe to modify a loan.

Additionally, it is important to underscore that the “best interest of the borrower” provision in this rule prohibits predatory lending practices, such as negative amortization. And, in those cases where state law applies and is more stringent, credit unions must comply with those consumer financial protection standards. So, this rulemaking establishes a regulatory floor, not a ceiling for consumer financial protection.

Finally, the NCUA has instructed its examiners to refrain from criticizing a credit union’s efforts to provide prudent relief for members, when conducted in a reasonable manner with proper controls and management oversight. As such, credit unions should continue to focus on the needs of their members and the communities they serve by providing prudent relief measures like the capitalization of interest as part of a loan modification package. In the long term, members will remember who supported them during their times of need. And, credit unions will be fulfilling the cooperative philosophy at the heart of the credit union movement.

Before recognizing my fellow Board members, I do have a few questions that I will ask together. What are the plans for issuing new letters to credit unions about this change in our rules? How quickly will we act? And, how quickly can credit unions start using this new tool?

Thank you for that response. As we learned during the Great Recession more than a decade ago, avoiding foreclosure to the greatest extent possible is often a win-win-win for consumers, credit unions, communities, and our country. This final rule should serve members and our economy well in the long term.

That concludes my remarks. I now recognize Vice Chairman Hauptman.

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