When It Comes To Capitalizing Interest, Don’t Forget The Big Picture

August 9, 2021 at 9:39 am Leave a comment

Properly handling loan delinquencies is one of the things I find most challenging to talk about from a legal and compliance perspective. On the one hand, the concept is straight forward; but in practice, developing and implementing a program which strikes the appropriate balance between maximizing the number of members who can benefit from loan modifications against the need to make sure that a credit union is simply not rearranging the deck chairs on the Titanic is a fact sensitive inquiry which depends on the size, sophistication and skill of a given credit union as well as the examiner evaluating its program.

I am waxing philosophically about loan workouts this morning because NCUA issued this letter to credit unions providing more guidance on its recent decision to allow credit unions to capitalize unpaid interest under some circumstances. It makes perfect sense to once again give credit unions this flexibility, which was only taken away from them in 2012, in response to the last financial crisis, particularly since forbearance and workouts have been such an important part of the regulatory response to the pandemic.

However, pandemics come and go and at some point, sooner than you think, your loan files will be evaluated with the benefit of hindsight and a hazy memory about how bad things really were. As a result, you should implement this new authority in the context of your larger loan modification program. A good place to start is this  supervisory letter issued in 2013 by NCUA.

Irrespective of your credit union’s size, your credit union should be executing loan workouts, including capitalizing interest payments, consistent with written policies. Such policies should be predicated on documenting why your credit union has concluded that a member can repay a loan under its restructured terms. Where it gets tricky is where your credit union engages in a higher volume of loans. Examiners will pay closer scrutiny to those credit unions whose loan workouts could impact its bottom-line in a material way.

Remember too, there are some basic regulatory guide rails.  For instance, your credit union can’t capitalize credit union fees and commissions and generally must stop accruing interest on a delinquent loan after ninety days.  While your credit union has flexibility regarding how it will capitalize the interest, make sure that the new terms and conditions are properly documented.  This is, after all, a contract.

Much of this advice is operational, but what I have found in talking to credit union professionals over the years who excel in this area of banking is that many of them have an intuitive feel for what needs to be done but don’t have the time to memorialize what for them is little more than common sense.  A little more documentation can go a long way.

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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