Guidance for Credit Unions Capitalizing Interest
This blog was authored by my colleague Eric Burroughs, Financial Institution Assurance Manager
On June 24, 2021, the NCUA Board voted to remove the prohibition on the capitalization of interest for loan modifications and workouts. This change, which became effective July 30, 2021, is applicable for all federally insured credit unions (FICUs) and applies to all types of workout loans including commercial and business loans.
Under this new rule, capitalization of interest constitutes the addition of accrued but unpaid interest to the principal balance of the loan. The FICU and the borrower may utilize the rule as a part of the modification process, however additional advances to finance credit union fees and commissions is still prohibited. The NCUA Board was urged to revisit this topic due to the COVID-19 pandemic and ultimately believes this final ruling is in the best interest of the FICU and borrowers.
Policy Updates
The first step for all FICUs is to update their loan modification policy to address how the new rule will be addressed for the credit union. The policy should also have clear language that prohibits the additional advancement of fees and commissions. FICUs must also continue in their efforts to support the borrower’s ability to repay the debt.
Accounting Considerations
As you work though these modifications and the capitalization of accrued interest, FICUs should consider the following:
- Most of the time, these loans will already be in non-accrual status and the accrued interest will have been either reversed or charged-off at the 90-day point.
- If, through a workout or modification, the interest is capitalized into the principal balance of the loan, the credit union must recognize the accrued interest as interest income, but it should be deferred over the remaining life of the loan.
- It is also important to remember that the definition of a troubled debt restructuring (TDR) has not changed and should be reported as such if it meets the requirements.
How can we help?
CLA can help your credit union comply with the requirements related to capitalizing interest as well as with the policy updates. Subscribe to our CLA Financial Institutions Blog to receive future communications on other important topics for financial institutions. Contact Us to learn more about how we can help you navigate the requirements related to the capitalization of interest.
Dean has more than 25 years of experience providing audit, internal audit, and consulting services to financial services companies. He has provided consulting services in the areas of business lending, product costing and profitability, and asset/liability management. Dean has worked with a number of financial services companies on strategic issues such as board governance and enterprise risk management, as well as the role of internal audit and risk management, regulatory issues, and many accounting related topics.
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