CECL, Interest Rate Ceiling & Capitalization of Interest Rules Approved by NCUA Board

The three agenda items on the NCUA board’s schedule were all discussed and all unanimously approved by the three-member board on Thursday. The ratified issues ranged from updates to the Current Expected Credit Loss (CECL) Methodology to extending the 18% interest rate ceiling until March of 2023.

Federal Credit Union Loan Interest Rate Ceiling

NCUA staff members analyzed money market rates and found that lowering the interest rate ceiling for federal credit unions below the current temporary 18% rate would threaten the safety and soundness of credit unions “due to the anticipated adverse effect upon liquidity, capital, earnings and growth.”

NCUA Chairman Todd Harper said, “Going forward, I encourage all credit unions to offer their 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 have caused them to go to a payday lender.”

In a 3-0 vote of approval by board members, the temporary interest rate ceiling will be effective from Sept. 11, 2021 until March 10, 2023.

Vice Chairman Kyle Hauptman and Board Member Rodney Hood agreed with Harper that this will be an important resource for low-income credit unions that are trying to help members who’ve been economically devastated by the pandemic.

As credit unions and the economy continues to recover, Hood made a suggestion to institute a new advisory board made up of credit unions to help give the NCUA better insight into the needs of credit unions during this recovery.

“It’s more important than ever that we hear directly from credit unions,” Hood said. “We need to do a much better job at getting on-the-ground feedback from credit unions in an informal setting where credit unions do not feel they will be reprimanded for giving honest and constructive feedback.”

Harper and Hauptman both agreed with Hood’s idea.

Final Rule, Part 702, Current Expected Credit Loss Methodology

In another 3-0 vote of approval, this part of the final rule, according to a statement by Harper, allows credit unions “to temporarily mitigate the initial impact of CECL’s adoption by allowing a covered federally-insured credit union to phase in the day-one effects on its net worth ratio over a three-year period under the NCUA’s prompt corrective action standards.”

Hauptman made a point that while credit unions are caught up in the new reality of CECL, credit unions didn’t cause the problem. “I empathize with credit unions that feel their pain of yet another cost for problems created by others,” said Hauptman. “CECL has major cost in time, effort and regulatory risk,” he said.

According to the terms of the final rule, the phase-in would only apply to those federally-insured credit unions that adopt CECL for the fiscal years beginning on or after Dec. 15, 2022.

The NCUA staff are developing educational and training sessions for credit unions and examiners to be rolled out sometime next year.

Final Rule, Part 741, Appendix B, Capitalization of Interest

With yet another unanimous vote (3-0), the NCUA board approved the final rule to remove 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.

Harper said, “It also establishes 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. These measures would apply to workouts of all types of member loans, including commercial and business loans.”

Board members agreed that this final rule will give credit unions parity with banks, as well as organization giants such as Fannie Mae, Freddie Mac and the Federal Housing Administration, which all currently allow servicers to capitalize interest as part of their modification programs.

NCUA Director of the Office of Examination and Insurance Myra Toeppe said, “This rule going forward, even after the pandemic, this just gives credit unions another tool in the toolbox in order to work with borrowers. So I think it is really important and it puts credit unions on par with banks and is again, another tool for them to use to help their members modify loans.”

According to the NCUA, the final rule goes into effect 30 days after it is filed with the national registry.