NCUA BOARD APPROVES CAPITALIZATION OF INTEREST RULE PROVIDING LONG NEEDED PARITY WITH BANKS
Tuesday, June 29, 2021
With a Republican NCUA Board majority and a Democrat NCUA Board Chairman, it is not surprising that not much of significance has come forward from the NCUA Board thus far in 2021.
Democrat Chairman Todd Harper is trying to gauge how far he can go with a 2-1 board majority from the other side of the aisle that largely disagrees with his regulatory philosophy on many key issues. He has control of the agenda, but not the votes to pass anything that the other two board members disagree with. He has supervisory authority over the staff, but even the staff can count to two and know that they could easily get caught between the Chairman that supervises them and the board majority that can pass or not pass the regulations they enforce.
Vice Chairman Kyle Hauptman and Board Member Rodney Hood, both Republicans, are also getting their feet on the ground as to how far they can go in pursuing regulatory actions that they have the votes to pass – but not the control of the agenda or the staff that will prepare the rules and enforce them when adopted.
There seems to be very little compromise and virtually no significant movement on the major rules still awaiting action such as the CUSO rule expanding CUSO lending authority to all types of loans credit unions are empowered to make; the service facility rule that will make shared branching, ITMs and ATMs into acceptable service facilities for FOM expansion purposes; the overdraft fees rule that gives credit unions some authority to amend their charge-off policies to provide some extension from the current 45-day charge-off rule for over-drafted checking accounts; and the mortgage servicing rule that extends more flexibility for credit union mortgage servicing rights.
When, and if, any of those issues break loose, it would be a sign that Hauptman and Hood have flexed their 2-1 majority muscle and forced the final rules on the board agenda – an authority that exists but has seldom been used to override a chairman who would not put an issue on the agenda if there are two solid votes in favor of the rule.
Until some of those final rules that Hood and Hauptman supported when they were proposed (and Harper opposed) start showing up on the agenda for action, the assumption must be that Chairman Harper is still driving the agenda. And it is a very uneventful agenda as far as regulatory actions go.
That said, the three NCUA Board members did come together last week to approve unanimously three final rules. None of them were on the major rulemaking list that we outlined above. Two of them were fairly perfunctory (phasing in the CECL adverse effects over a three-year period and reaffirming the 18% interest rate ceiling cap for federal credit unions).
However, the third was much more significant. And, although it was approved because of the COVID impact on many borrowers who fell behind on their loans during the economic disruption of 2020 and are needing loan restructuring now that it has come time to start making payments again, the benefit of the final rule will last beyond the current COVID era.
For that reason, the NCUA Board deserves commendation for coming together and approving last Thursday a final rule removing the prohibition on the capitalization of interest in connection with loan workouts and modifications.
Banks have long had this authority, but credit unions were prevented by NCUA regulation from adding unpaid interest back into the principal of a loan in a workout or modification.
By removing this prohibition, the NCUA Board has not only made loan workouts more likely to be structured in a way that is a win-win for both the borrower and the credit union – but they have also removed a longstanding competitive disadvantage credit unions had vis-à-vis their banking brethren.
As you begin to work through loan modifications with your members who are getting back to paying their loans which were previously extended or provided with forbearance during COVID, this new rule on the ability to capitalize interest is something you need to be aware of.
Below is a link to the final rule. We encourage you and your workout team to study it and become aware of the options it provides you to help meet the needs of your members, while at the same time enabling the credit union to re-earn some of the unpaid interest lost during the period of extension or forbearance by incorporating it, in whole or in part, back into the principal with restructured terms.
https://www.ncua.gov/files/agenda-items/AG20210624Item3b.pdf
While not as far-reaching as some of the aforementioned issues they have not yet addressed, this is a very positive move and one that is, frankly, overdue. I guess you could say it is one of the positives that came out of COVID.
MORE DISTRIBUTIONS UNDER THE CORPORATE SYSTEM RESOLUTION PROGRAM ARE FORTHCOMING FOR CREDIT UNIONS THAT SUFFERED CAPITAL INVESTMENT LOSSES AT MEMBERS UNITED, SOUTHWEST CORPORATE AND US CENTRAL
NCUA announced yesterday that an additional $865.5 million will be distributed back to credit unions that had capital investments in three liquidated corporate credit unions (Members United, Southwest Corporate and US Central). These distributions will come from the corporate system recovery fund that NCUA has been administering, with the support of the US Treasury and the issuance of notes backed by the assets, since the financial crisis created a corporate credit union crisis in 2009-10.
The timing of this distribution is interesting in that this year, 2021, is the year the NCUA Guaranteed Notes issued to help manage the corporate resolution fund fully matured. NCUA is now out of the guarantor business for corporate losses and can truly say they have put the issue largely behind them.
There are still some corporate assets under management by NCUA, but the bulk of the recoveries have now taken place. This distribution will be the largest remaining distribution, although there could conceivably be much smaller ones to come as other assets are managed and any recoveries result.
The $865.5 million distribution will come in a formula very similar to the one used in July 2020 when the $171.3 million distribution was made from the corporate asset management as of end-of-year 2019 and again in April 2021 when the end-of-year 2020 recoveries were calculated and a $368 million distribution was made.
If you received a distribution from the 2019 or 2020 end-of-year calculations that totaled $539.3, then you should be able to calculate fairly closely the dollars you should receive from this $865.5 million distribution – the largest to date.
NCUA has provided the calculation formula on its website if you would like to pursue this further in your calculations of what to expect from the distribution. It is our understanding that the distribution will take place on or by September 1, 2021.
The link to the NCUA calculation matrix is below:
Until next time.