NCUA Letter to Credit Unions 21-CU-07 Capitalization of Unpaid Interest

On June 24, 2021, the NCUA Board unanimously voted to lift the prohibition of capitalization of interest in connection with loan workouts and modifications from Part 741, Appendix B. The rule became effective July 30, 2021 and applies to loan workouts and modifications on or after this date. The rule establishes documentation requirements to help ensure that the addition of unpaid interest to the principal balance of a loan does not hinder the borrower’s ability to repay the loan. The link to the letter below includes FAQs regarding considerations to be addressed when initiating this type of activity.

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 credit union. Modification options include lowering of loan payments or the interest rate, extending the maturity date, partial principal or interest forgiveness, and capitalization of interest. Such modifications may allow a borrower to repay the loan, which helps the borrower and the credit union avoid the costs of default and foreclosure. (Read the Letter to Credit Unions)