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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations
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example, from natural disasters such as hurricanes, temporary gaps in employment, or the current pandemic which may make it difficult to access documentation, even though the FICU
reasonably determines that the borrowers midto long-term income prospects remain intact.
Finally, the commenter stated that the way the proposed rule is drafted implies that these additional documentation requirements would apply to all modification types if the credit union merely permits interest capitalization.7
NCUA Response. The Board appreciates the support expressed by the large majority of commenters for the proposed consumer protection guardrails. The final rule adopts these consumer protection measures without change.
Appendix B applies to consumer and commercial loans. The rule requires that loan modification policies must provide for compliance with all applicable consumer protection laws and regulations. The term applicable indicates that FICUs must comply with the laws and regulations that apply to a particular transaction. While some of those, such as the Equal Credit Opportunity Act, might apply to a commercial loan, most will not.
As noted, one of the comments suggested additional consumer guardrails to prohibit changes to interest rates or fees. The Board designed the proposed rule to provide FICUs greater flexibility when restructuring an existing loan. However, the proposed rule requires that, when doing so, a FICU must consider whether the loan modification is well-designed and provides a favorable outcome for borrowers. While a fair consideration of a borrowers circumstances would generally not support an increase to interest rates or fees, the Board believes the language of the proposed rule provides the desired protections and declines to change it at this time.
In response to the commenters who raised concerns that compliance with the new requirements might be burdensome, the Board notes that the consumer protection guardrails added by this rule apply solely to loan modifications that involve the capitalization of interest. FICUs will therefore not be required to comply with 7 The proposed rule states in the regulatory text:
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 . . . Supra note 1, at 78272.

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the additional documentation requirements for other types of loan modifications. In addition, several of the guardrails reflect current best practices and requirements that should not impose any additional significant burden on credit unions. For example, credit unions are already required to comply with all applicable consumer protections laws and regulations. The guardrails reiterate the need for compliance to emphasize the importance of these legal consumer protections. Likewise, FICUs are already assumed to undertake the necessary due diligence to ensure a borrowers ability to repay. For example, Appendix B
currently requires that a FICUs loan modification policy must also ensure credit unions make loan workout decisions based on the borrowers renewed willingness and ability to repay the loan. 8 The Board also notes that the rule does not prescribe a specific method for making this determination, thereby providing credit unions with a large degree of flexibility in meeting the requirement. The rule requires only that FICUs maintain documentation reflecting how the determination was made.
Comment: Prohibition on Advancing Credit Union Fees and Commissions.
Seventeen commenters responded to question 6 regarding whether NCUA
should lift the current prohibition on the capitalization of credit union fees and commissions.
The commenters in support of maintaining the prohibition stated that they did not deem it necessary to charge such fees or feel that it was appropriate to charge internal fees to members who are struggling. They noted that continuing to prohibit the practice is an important consumer protection. One of the commenters stated that in the event the NCUA did decide to authorize the capitalization of credit union fees and commissions, appropriate limitations should be put in place, without which the potential for predatory behavior and risk to the member-borrower may be heightened.
Two commenters in support of removing the prohibition stated that FICUs should have the ability to charge reasonable modification fees so long as those fees are disclosed. One stated that FICUs have an incentive to not overburden the member with excessive workout-related fees to help the member repay the loan. Another commenter stated that if the NCUA chose not to allow all FICU fees to be capitalized, it 8 See 12 CFR part 741, Appendix B, section captioned Written Loan Workout Policy and Monitoring Requirements.

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should consider allowing the capitalization of fees up to a certain level. Another stated that for consumer protection purposes any fees charged for a modification involving interest capitalization should not be commissionable and that fees should be limited to actual costs incurred.
One FCU commenter stated that its mortgage modifications are handled by a third-party service provider which charges a fee for each modification. If the fee cannot be capitalized and the borrower cannot afford to pay it as a direct charge, the FCUs only alternatives are to deny the modification or absorb the cost. This commenter was the only one to provide some data regarding the actual cost of modification fees. Prior to 2012, when interest capitalization was permitted, the cost to this FCU for the modification of 170
mortgage loans would have been approximately $42,500. If the cost to the FCU of managing the program and operating its loan system were included, the cost more than doubled. The FCU
further noted that the fees are the reimbursement of costs and not a revenue generation opportunity.
NCUA Response. Having reviewed the comments, the Board is not persuaded that FICUs should be permitted to capitalize credit union fees and commissions at this time. Most commenters advocating for the change did not include any discussion of how borrowers would be protected from excessive fees or supply any data on the actual cost to FICUs of providing loan workouts with interest capitalization.
The final rule continues to permit FICUs to make advances covering third-party fees, such as force-placed insurance or property taxes. The Board, however, continues to believe that the current restrictions on fee reimbursement have provided a level of protection for borrowers in distress. The Board agrees with the comment that it would be contrary to the purposes of the credit union system to capitalize internally generated fees and commissions in a time of economic stress. Accordingly, credit union fees and commissions must be paid directly by the borrower at the time of the modification and not added to the loan balance.
C. Other Issues Raised by Commenters Comment: Federal Preemption of State Consumer Protection Laws. Two commenters raised state preemption issues. Both commenters asked the NCUA to clarify that the proposed rules requirement that all FICUs follow applicable state consumer protection laws does not override its regulation preempting state law on issues
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