NCUA Publishes Two Final Rules

NCUA recently published two final rules. The first amends existing regulations to remove the prohibition on the capitalization of interest for loan workouts and modifications. The second rule amends regulations to facilitate the adoption, by federally insured credit unions (FICUs), to the current expected credit loss (CECL) methodology that is mandated under U.S. Generally Accepted Accounting Principles (GAAP).

The rule removing the prohibition on the capitalization of interest in connection with loan workouts and modifications amends Appendix B to Part 741 of NCUA’s regulations.  The final rule adopts NCUA’s proposed rule from December 2020 without change.  Under the final rule, in order for a FICU to permit capitalization of interest for loan modifications, the FICU’s policy on loan workouts must require certain items including, but not limited to, compliance with applicable consumer protection laws and documentation that reflects a borrower’s ability to repay.  In NCUA’s summary of the final rule the agency notes that the changes in the rule apply to workouts of all types of loans by FICUs, including commercial and business loans.  NCUA also stresses that the rule only applies to loan workout and modifications involving the capitalization of interest, but that the rule does not address the capitalization of interest in other scenarios.  The final rule does not alter the prohibition on additional advances to finance credit union fees and commissions, which remains in place. The final rule also makes certain technical, non-substantive, updates to Appendix B.  The final rule took effect July 30, 2021.

The second final rule that was recently published amends NCUA regulations to facilitate the adoption of CECL accounting methodology by providing transition provisions, including that for purposes of the prompt corrective action (PCA) regulations and determining a FICU’s net worth classification, the Board will phase-in the day-one adverse effects on regulatory capital that may result from adoption of CECL.  FICUs that have not adopted CECL prior to their first fiscal year beginning after December 15, 2022 (the implementation date established by the Federal Accounting Standards Board, which establishes GAAP standards) are eligible for the phase-in. The rule includes details on the transition, including an example transition schedule. This final rule took effect August 2, 2021.