In two separate letters to credit unions on Thursday, the NCUA encouraged credit unions to work with members experiencing financial difficulties due to the COVID-19 pandemic using “safe and sound” approaches, and also reminded them that the NCUA board recently approved maintaining the current temporary 18% interest rate ceiling for loans made by federal credit unions for a new 18-month period.

Lifting prohibition of capitalization of interest

Citing the NCUA board’s lifting of the prohibition of capitalization of interest in connection with loan workouts and modifications from part 741, Appendix B at its June 24 meeting, the agency told credit unions that it will not object to previous loan modifications, including interest capitalization, prior to the effective date of this rule change — if such efforts are conducted in “a reasonable manner with proper controls and management oversight.”

The board finalized the rule largely as proposed during its November 2020 meeting. 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 rule became effective July 30, 2021. The agency’s full letter can be accessed on the NCUA website.

Interest rate ceiling

The agency also reminded credit unions that the NCUA board approved maintaining the current temporary 18% interest rate ceiling for loans made by federal credit unions for a new 18-month period.

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.”

The letter stated that the NCUA board’s June 24, 2021 action extends the 18% ceiling through March 10, 2023. The previous 18% rate ceiling expires on Sept. 10, 2021. This letter is also accessible on the NCUA website.