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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations
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pertaining to terms of repayment 12
CFR 701.21b1iiB. Both commenters noted that some states prohibit the charging of interest on interest which if not preempted will dampen the effectiveness of NCUAs proposed rule.
NCUA Response: As an initial matter, the NCUA notes that the part 701
regulations, including 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 NCUAs 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.
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.
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 COVID19
pandemic, and the resulting stresses that have been placed on FICUs and 9 As provided in 701.21a, certain provisions of 701.21 apply to FISCUs as specified in 741.23;
however, the part 741 provision does not make 701.21b1iiB applicable to FISCUs.
10 See generally the NCUA Examiners Guide, for more information regarding the agencys examination process, including examination findings and DORs. The Guide is available at:
https publishedguides.ncua.gov/examiner/Pages/
default.htmExaminersGuide/
Home.htm%3FTocPath%3D_1.
11 Bowen v. Georgetown Univ. Hosp., 488 U.S. 204
1988.

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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 examiners 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.
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 NCUAs 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 COVID19.16 The NCUA is not revising 12 Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID19 Pandemic on Institutions June 2020, page 6, available at https www.ncua.gov/files/
press-releases-news/examiner-guidance-covid19effect.pdf.
13 Id.
14 See Federal Accounting Standards Board FASB Accounting Standards Codification ASC
31040, ReceivablesTroubled Debt Restructurings by Creditors, available at https asc.fasb.org/
subtopic&trid=2196892.
15 See section 202b6Ci of the Federal Credit Union Act 12 U.S.C. 1782b6Ci.
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.

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any TDR requirements through this rulemaking.
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 Bthe 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 forceplaced 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 FICUs policy must establish limits on
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