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

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

Dear Boards of Directors and Chief Executive Officers:

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.

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