At its Thursday meeting via live audio webcast, the NCUA board of directors unanimously approved three items:
- a final rule that removes the prohibition on the capitalization of interest in connection with loan workouts and modifications;
- a final rule that would phase in the day-one adverse effects on regulatory capital that may result from the adoption of the CECL accounting methodology over a three-year period; and
- an extension of the federal credit union loan interest rate ceiling until March 10, 2023.
Capitalization of interest
The board finalized the rule largely as proposed during its November 2020 meeting, as reported in the New York Minute. The rule removes the prohibition on credit unions from capitalizing interest on loan modifications while maintaining the important prohibition on a credit union capitalizing credit union fees and commissions, according to the NCUA. It also establishes consumer financial protection “guardrails,” such as the ability to repay requirements to ensure that the addition of unpaid interest to the principal balance of a mortgage loan will not hinder the borrower’s ability to make payments or become current on the loan.
The board finalized the rule that would phase-in the day-one adverse effects on regulatory capital that may result from fully implementing the CECL accounting methodology, also largely as proposed during a previous meeting in July 2020.
Under the final rule, the day-one effects of CECL on a federally insured credit union’s net worth ratio would be phased-in over a three-year period under the NCUA’s prompt corrective action regulations, according to the agency. The phase-in would only be applied to those federally insured credit unions that adopt CECL for the fiscal years beginning on or after Dec. 15, 2022, which is the deadline established by the Financial Accounting Standards Board for CECL’s implementation. The agency said that credit unions that decide to adopt CECL for the fiscal years beginning before that date would not be eligible for the phase-in.
Loan interest rate ceiling
After reviewing recent trends in money-market rates and financial conditions among federal credit unions, the board approved maintaining the current temporary 18% interest rate ceiling for loans made by federal credit unions for a new 18-month period Sept. 11, 2021 through March 10, 2023, according to the NCUA.
The Federal Credit Union Act caps the interest rate on federal credit union loans at 15%, however, the NCUA board has the discretion to raise that limit for 18-month periods if interest-rate levels could threaten “safety and soundness.”
Todd Harper, NCUA chairman, encouraged credit unions to offer members lower rates whenever possible and to develop affordable loan products that include a savings feature. “Providing members with an easy way to save for a rainy day will help them weather small emergencies that might otherwise cause them to go to a payday lender.”