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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations
V. Regulatory Procedures
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I. Background: The Boards December 4, 2020, Proposed Rule At its November 19, 2020, meeting, the Board proposed amending the NCUAs regulations to remove the prohibition on the capitalization of interest in connection with loan workouts and modifications. The proposed rule was subsequently published in the Federal Register on December 4, 2020.1 The prohibition is codified in Appendix B to Part 741
hereinafter referred to as Appendix B of the NCUAs regulations.
As explained in the preamble to the December 4, 2020, proposed rule, the NCUA established the prohibition on authorizing additional advances to finance unpaid interest in a May 3, 2012, final rule.2 The May 2012 final rule established loan workout and monitoring requirements applicable to all federally insured credit unions FICUs. Among other amendments, the final rule required that FICUs have written policies addressing loan workouts and nonaccrual practices.
Under that final rule, such policies were required to prohibit a FICU from authorizing additional advances to a borrower to finance unpaid interest capitalization of interest and credit union fees and commissions. However, the final rule permitted FICUs to make such advances to cover third-party fees, such as force-placed insurance and property taxes.
The Board was prompted to reconsider these prohibitions because of the challenges and economic disruption caused by the COVID19 pandemic. For borrowers experiencing financial hardship, a prudently underwritten and appropriately managed loan modification, consistent with safe and sound lending practices, is generally in the long-term best interest of both the borrower and the FICU. Such modifications may allow a borrower to remain in their home or a commercial borrower to maintain operations and can help FICUs minimize the costs of default and foreclosures. Thus, the prohibition in the May 2012 final rule on the capitalization of interest might be overly burdensome and, in some cases, possibly hamper a FICUs good-faith efforts to engage in loan workouts with borrowers facing financial difficulty.
Other considerations, such as parity with the treatment of interest 1 85 FR 78269 Dec. 4, 2020 https
www.govinfo.gov/content/pkg/FR-2020-12-04/pdf/
2020-25988.pdf.
2 77 FR 31993 May 31, 2012 https
www.govinfo.gov/content/pkg/FR-2012-05-31/pdf/
2012-13214.pdf.

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capitalization by banks, also factored in the Boards determination. Banks are not subject to the same prohibition on capitalizing interest the banking agencies have not adopted an absolute standard equivalent to the rule that the Board codified in 2012. The banking agencies have addressed capitalization of interest through guidance, letters, and Call Report instructions, none of which strictly prohibit the capitalization of interest when modifying loans. Further, the government-sponsored enterprises GSEsFannie Mae and Freddie Mac have had a long-standing policy supporting the ability of servicers to capitalize interest and fees as part of a prudent modification program.
Accordingly, the Board issued the December 4, 2020, proposed rule to make capitalization of interest a permissible option indefinitely. The proposed rule applies to workouts of all types of member loans, including commercial and business loans. In proposing the change, the Board underscored that Appendix B currently requires several safety and soundness and consumer protection-oriented measures that would also apply to capitalizing interest. The Board also proposed to add several consumer protection and safety and soundness requirements to Appendix B for FICUs when they modify loans with an interest capitalization component.
The proposed rule also makes several technical changes to Appendix B to improve its clarity and update certain references. Interested readers should refer to the preamble of the December 4, 2020, proposed rule for additional background and information on the proposed regulatory changes.
II. Legal Authority The Board issues this final rule pursuant to its authority under the Federal Credit Union FCU Act.3 Under the FCU Act, the NCUA is the chartering and supervisory authority for federal credit unions FCUs and the Federal supervisory authority for FICUs.4 The FCU Act grants the NCUA a broad mandate to issue regulations that govern both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe rules and regulations for the administration of the FCU Act.5
Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue rules and regulations necessary or appropriate to carry out its U.S.C. 1751 et al.
4 12 U.S.C. 17521775.
5 12 U.S.C. 1766a.

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III. Discussion of Public Comments Received on the December 4, 2020, Proposed Rule A. The Comments, Generally The proposed rule provided for a 60day public comment period, which closed on February 2, 2021. The NCUA
received 26 comments in response to the proposed rule. These came from FICUs, individuals, and credit union leagues and trade associations. In general, the commenters expressed support for lifting the prohibition on interest capitalization as a helpful tool to assist financially distressed borrowers. The main reasons given by commenters for supporting the proposed rule were parity with banks, which are not prohibited from capitalizing interest; parity for FICU
members whose loans are held in portfolio by the originating FICU and who, unlike members whose loans are sold on the secondary market, cannot currently take advantage of interest capitalization; and flexibility for distressed borrowers for whom interest capitalization may be the only realistic solution for avoiding foreclosure.
While noting the Boards interest in receiving public comment on all aspects of the interest capitalization issue, the preamble to the proposed rule also provided six questions requesting input on specific issues related to the proposed rule. This section of the preamble summarizes the issues raised by the public commenters and provides the Boards responses to these issues.
This comment summary is organized in two sections. The first addresses the comments received in response to the questions posed in the preamble. The second section summarizes the other issues raised by the commenters. As previously noted, and discussed more fully in the responses below, after careful review of the comments, the Board has elected to adopt the proposed regulatory amendments without change.
However, the Board is clarifying below its supervisory position with regard to FICUs that may already have begun offering interest capitalization prior to the finalization of this rule.
B. Comments on Specific Provisions Responses to NCUA Questions 1 to 4.
The NCUA asked FICUs to lay out their
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role as share insurer for all FICUs.6
Accordingly, the FCU Act grants the Board broad rulemaking authority to ensure that the credit union industry and the National Credit Union Share Insurance Fund remain safe and sound.

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U.S.C. 1789a11.

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