Credit unions would be permitted to include unpaid interest in loan workouts and modifications for all types of member loans – including commercial and business loans – under a rule proposed Thursday by their federal regulatory agency.
The National Credit Union Administration (NCUA) Board voted 3-0 in issuing the proposed rule, which revises Appendix B of the agency’s rules on share insurance.
The agency, in a summary, said the board has determined that the current prohibition on authorizing additional advances to finance unpaid interest may be overly burdensome and, in some cases, “hamper a federally insured credit union’s good-faith efforts to engage in loan workouts with borrowers facing difficulty because of the economic disruption that the COVID-19 event has caused.” It said advancing interest may avert the need for alternatives that would harm borrowers.
The NCUA said the proposed rule would establish 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. That documentation must reflect a borrower’s ability to repay, a borrower’s source (or sources) of repayment, and – when appropriate – compliance with the credit union’s valuation policies at the time the modification is approved.
The proposed rule would continue to require that a credit union’s workout policy set limits on the number of modifications allowed for an individual loan; and that the credit union’s loan workout decisions be based on a borrower’s renewed willingness and ability to repay the loan.
Also retained is the prohibition on the authorization of additional advances to finance credit union fees and commissions. A credit union would still be permitted to make advances to cover third party fees to protect loan collateral, such as force-placed insurance or property taxes.
The proposal, which also makes technical and clarifying changes to Appendix B, will be out for a 60-day comment period that begins upon its publication in the Federal Register.