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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations
the number of modifications allowed for an individual loan. Further, the policy must ensure that a FICU make loan workout decisions based on a borrowers 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 borrowers 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 FICUs 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 unions 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 FICUs 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
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Federal preemption determinations that may be appropriate.
2. Documentation that reflects a borrowers ability to repay, a borrowers sources of repayment, and when appropriate, compliance with the FICUs 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.

replaced the cost recovery method of income recognition in ASC 6051025
4 with transition guidance found in ASC
606Revenue 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.
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 FICUs 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.

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 NCUAs 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 201409 which
A. Regulatory Flexibility Act
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V. Regulatory Procedures 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 17 81 FR 13530 Mar. 14, 2016 https
www.govinfo.gov/content/pkg/FR-2016-03-14/pdf/
2016-03955.pdf.
18 5 U.S.C. 603a.
19 80 FR 57512 Sept. 24, 2015 https
www.govinfo.gov/content/pkg/FR-2015-09-24/pdf/
2015-24165.pdf.

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