Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 34611 

■ d. In section 17 of the ‘‘Common Crop 

Insurance Policy,’’ revise paragraph 

(f)(1)(iv); 

■ e. In section 34 of the ‘‘Common Crop 

Insurance Policy,’’ add paragraph 

(a)(4)(ix); and 

■ f. In section 37 of the ‘‘Common Crop 

Insurance Policy,’’ revise paragraphs (c) 

and (e). 

The additions and revisions read as 

follows: 

§ 457.8 The application and policy. 

* * * * * 

Common Crop Insurance Policy 

* * * * * 

1. Definitions 

* * * * * 

Veteran farmer or rancher. (1) An 

individual who has served active duty 

in the United States Army, Navy, 

Marine Corps, Air Force, or Coast 

Guard, including the reserve 

components; was discharged or released 

under conditions other than 

dishonorable; and: 

(i) Has not operated a farm or ranch; 

(ii) Has operated a farm or ranch for 

not more than 5 years; or 

(iii) First obtained status as a veteran 

during the most recent 5-year period. 

(2) A person, other than an 

individual, may be eligible for veteran 

farmer or rancher benefits if all 

substantial beneficial interest holders 

qualify individually as a veteran farmer 

or rancher in accordance with paragraph 

(1) of this definition; except in cases in 

which there is only a married couple, 

then a veteran and non-veteran spouse 

are considered a veteran farmer or 

rancher. 

* * * * * 

14. Duties in the Event of Damage, Loss, 

Abandonment, Destruction, or 

Alternative Use of Crop or Acreage 

* * * * * 

(b) * * * 

(6) You must give us notice in 

accordance with section 36(a)(3) to 

replace post-quality actual yields for 

previous crop years. 

* * * * * 

17. Prevented Planting 

* * * * * 

(f) * * * 

(1) * * * 

(iv) The acreage that was prevented 

from being planted constitutes at least 

20 acres or 20 percent of the total 

insurable acreage in the field and you 

provide proof that you intended to plant 

another crop, crop type, or follow both 

practices on the acreage (including, but 

not limited to inputs purchased, applied 

or available to apply, or that acreage was 

part of a crop rotation). 

* * * * * 

34. Units 

(a) * * * 

(4) * * * 

(ix) You may elect enterprise units as 

allowed by the Crop Provisions if 

provided in the actuarial documents. 

* * * * * 

37. Organic Farming Practices 

* * * * * 

(c) You must provide the following 

organic records, as applicable: 

(1) By the acreage reporting date, 

except as allowed by section 37(c)(2), 

you must have: 

(i) For certified organic acreage, a 

written certification in effect from a 

certifying agent indicating the name of 

the entity certified, effective date of 

certification, certificate number, types of 

commodities certified, and name and 

address of the certifying agent (A 

certificate issued to a tenant may be 

used to qualify a landlord or other 

similar arrangement). 

(ii) For transitional acreage, a 

certificate as described in section 

37(c)(1)(i), or written documentation 

from a certifying agent indicating an 

organic plan is in effect for the acreage. 

(iii) For certified organic and 

transitional acreage, records from the 

certifying agent showing the specific 

location of each field of certified 

organic, transitional, buffer zone, and 

acreage not maintained under organic 

management. 

(2) If you do not meet the 

requirements in section 37(c)(1)(i) or 

(ii), you must provide documentation 

that you have requested, in writing, 

your written certification or organic 

plan by the acreage reporting date. 

(i) Your certificate or plan must be in 

effect prior to the earlier of the end of 

the insurance period or when coverage 

ends as provided in section 11(b). 

(ii) Your acreage will remain insured 

under the practice you reported on the 

acreage reporting date unless you have 

a loss. If you have a loss and do not 

have a certificate or plan in place at the 

time the claim is finalized in accordance 

with the applicable policy provisions, 

then your acreage will be insured under 

the practice for which it qualifies. 

* * * * * 

(e) If any acreage qualifies as certified 

organic or transitional acreage on the 

date you report such acreage, and such 

certification is subsequently revoked or 

suspended by the certifying agent, or the 

certifying agent does not consider the 

acreage as transitional acreage for the 

remainder of the crop year, that acreage 

will remain insured under the reported 

practice for which it qualified at the 

time the acreage was reported. Any loss 

due to failure to comply with organic 

standards will be considered an 

uninsured cause of loss. 

* * * * * 

Richard H. Flournoy, 

Acting Manager, Federal Crop Insurance 

Corporation. 

[FR Doc. 2021–13939 Filed 6–29–21; 8:45 am] 

BILLING CODE 3410–08–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 741 

[NCUA 2020–0114] 

RIN 3133–AF30 

Capitalization of Interest in Connection 

With Loan Workouts and Modifications 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: The NCUA Board (Board) is 

amending its regulations to remove the 

prohibition on the capitalization of 

interest in connection with loan 

workouts and modifications. The final 

rule also establishes documentation 

requirements to help ensure that the 

addition of unpaid interest to the 

principal balance of a mortgage loan 

does not hinder the borrower’s ability to 

become current on the loan. The Board 

has also taken the opportunity afforded 

by the rulemaking to make several 

technical changes to the regulations to 

improve their clarity and update certain 

references. The final rule follows 

publication of the December 4, 2020, 

proposed rule and takes into 

consideration the public comments on 

the proposed rule. After careful 

consideration, the Board has decided to 

adopt the proposed rule without change. 

DATES: Effective July 30, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Policy: Alison L. Clark, Chief 

Accountant, and Timothy C. Segerson, 

Deputy Director, Office of Examinations 

and Insurance, at (703) 518–6360; Legal: 

Ariel Pereira and Gira Bose, Senior Staff 

Attorneys, Office of General Counsel, at 

(703) 518–6540. 

SUPPLEMENTARY INFORMATION: 

I. Background: The Board’s December 4, 

2020, Proposed Rule 

II. Legal Authority 

III. Discussion of Public Comments Received 

on the December 4, 2020, Proposed Rule 

IV. This Final Rule 


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1 85 FR 78269 (Dec. 4, 2020) (https://

www.govinfo.gov/content/pkg/FR-2020-12-04/pdf/ 

2020-25988.pdf). 

2 77 FR 31993 (May 31, 2012) (https://

www.govinfo.gov/content/pkg/FR-2012-05-31/pdf/ 

2012-13214.pdf). 

3 12 U.S.C. 1751 et al. 

4 12 U.S.C. 1752–1775. 

5 12 U.S.C. 1766(a). 6 12 U.S.C. 1789(a)(11). 

V. Regulatory Procedures 

I. Background: The Board’s December 

4, 2020, Proposed Rule 

At its November 19, 2020, meeting, 

the Board proposed amending the 

NCUA’s regulations to remove the 

prohibition on the capitalization of 

interest in connection with loan 

workouts and modifications. The 

proposed rule was subsequently 

published in the Federal Register on 

December 4, 2020.1 The prohibition is 

codified in Appendix B to Part 741 

(hereinafter referred to as ‘‘Appendix 

B’’) of the NCUA’s regulations. 

As explained in the preamble to the 

December 4, 2020, proposed rule, the 

NCUA established the prohibition on 

authorizing additional advances to 

finance unpaid interest in a May 3, 

2012, final rule.2 The May 2012 final 

rule established loan workout and 

monitoring requirements applicable to 

all federally insured credit unions 

(FICUs). Among other amendments, the 

final rule required that FICUs have 

written policies addressing loan 

workouts and nonaccrual practices. 

Under that final rule, such policies were 

required to prohibit a FICU from 

authorizing additional advances to a 

borrower to finance unpaid interest 

(capitalization of interest) and credit 

union fees and commissions. However, 

the final rule permitted FICUs to make 

such advances to cover third-party fees, 

such as force-placed insurance and 

property taxes. 

The Board was prompted to 

reconsider these prohibitions because of 

the challenges and economic disruption 

caused by the COVID–19 pandemic. For 

borrowers experiencing financial 

hardship, a prudently underwritten and 

appropriately managed loan 

modification, consistent with safe and 

sound lending practices, is generally in 

the long-term best interest of both the 

borrower and the FICU. Such 

modifications may allow a borrower to 

remain in their home or a commercial 

borrower to maintain operations and 

can help FICUs minimize the costs of 

default and foreclosures. Thus, the 

prohibition in the May 2012 final rule 

on the capitalization of interest might be 

overly burdensome and, in some cases, 

possibly hamper a FICU’s good-faith 

efforts to engage in loan workouts with 

borrowers facing financial difficulty. 

Other considerations, such as parity 

with the treatment of interest 

capitalization by banks, also factored in 

the Board’s determination. Banks are 

not subject to the same prohibition on 

capitalizing interest (the banking 

agencies have not adopted an absolute 

standard equivalent to the rule that the 

Board codified in 2012). The banking 

agencies have addressed capitalization 

of interest through guidance, letters, and 

Call Report instructions, none of which 

strictly prohibit the capitalization of 

interest when modifying loans. Further, 

the government-sponsored enterprises 

(GSEs)—Fannie Mae and Freddie Mac— 

have had a long-standing policy 

supporting the ability of servicers to 

capitalize interest and fees as part of a 

prudent modification program. 

Accordingly, the Board issued the 

December 4, 2020, proposed rule to 

make capitalization of interest a 

permissible option indefinitely. The 

proposed rule applies to workouts of all 

types of member loans, including 

commercial and business loans. In 

proposing the change, the Board 

underscored that Appendix B currently 

requires several safety and soundness 

and consumer protection-oriented 

measures that would also apply to 

capitalizing interest. The Board also 

proposed to add several consumer 

protection and safety and soundness 

requirements to Appendix B for FICUs 

when they modify loans with an interest 

capitalization component. 

The proposed rule also makes several 

technical changes to Appendix B to 

improve its clarity and update certain 

references. Interested readers should 

refer to the preamble of the December 4, 

2020, proposed rule for additional 

background and information on the 

proposed regulatory changes. 

II. Legal Authority 

The Board issues this final rule 

pursuant to its authority under the 

Federal Credit Union (FCU) Act.3 Under 

the FCU Act, the NCUA is the chartering 

and supervisory authority for federal 

credit unions (FCUs) and the Federal 

supervisory authority for FICUs.4 The 

FCU Act grants the NCUA a broad 

mandate to issue regulations that govern 

both FCUs and FICUs. Section 120 of 

the FCU Act is a general grant of 

regulatory authority and authorizes the 

Board to prescribe rules and regulations 

for the administration of the FCU Act.5

Section 209 of the FCU Act is a plenary 

grant of regulatory authority to the 

NCUA to issue rules and regulations 

necessary or appropriate to carry out its 

role as share insurer for all FICUs.6

Accordingly, the FCU Act grants the 

Board broad rulemaking authority to 

ensure that the credit union industry 

and the National Credit Union Share 

Insurance Fund remain safe and sound. 

III. Discussion of Public Comments 

Received on the December 4, 2020, 

Proposed Rule 

A. The Comments, Generally 

The proposed rule provided for a 60- 

day public comment period, which 

closed on February 2, 2021. The NCUA 

received 26 comments in response to 

the proposed rule. These came from 

FICUs, individuals, and credit union 

leagues and trade associations. In 

general, the commenters expressed 

support for lifting the prohibition on 

interest capitalization as a helpful tool 

to assist financially distressed 

borrowers. The main reasons given by 

commenters for supporting the 

proposed rule were parity with banks, 

which are not prohibited from 

capitalizing interest; parity for FICU 

members whose loans are held in 

portfolio by the originating FICU and 

who, unlike members whose loans are 

sold on the secondary market, cannot 

currently take advantage of interest 

capitalization; and flexibility for 

distressed borrowers for whom interest 

capitalization may be the only realistic 

solution for avoiding foreclosure. 

While noting the Board’s interest in 

receiving public comment on all aspects 

of the interest capitalization issue, the 

preamble to the proposed rule also 

provided six questions requesting input 

on specific issues related to the 

proposed rule. This section of the 

preamble summarizes the issues raised 

by the public commenters and provides 

the Board’s responses to these issues. 

This comment summary is organized in 

two sections. The first addresses the 

comments received in response to the 

questions posed in the preamble. The 

second section summarizes the other 

issues raised by the commenters. As 

previously noted, and discussed more 

fully in the responses below, after 

careful review of the comments, the 

Board has elected to adopt the proposed 

regulatory amendments without change. 

However, the Board is clarifying below 

its supervisory position with regard to 

FICUs that may already have begun 

offering interest capitalization prior to 

the finalization of this rule. 

B. Comments on Specific Provisions 

Responses to NCUA Questions 1 to 4. 

The NCUA asked FICUs to lay out their 


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experience or level of use with interest 

capitalization before the agency 

prohibited the practice in 2012. Of those 

that answered the question, one FICU 

stated that it did not allow the use of 

this mortgage modification tool. Others 

stated that it was beneficial, including 

one who said it was frequently used, 

particularly during the last financial 

crisis. One FICU stated that its program 

enjoyed an 85 percent success rate from 

2010 to 2012 and included 

approximately 170 workouts 

representing about $22 million in 

mortgage loans that were saved from 

foreclosure. 

The NCUA also asked how likely 

FICUs would be to use interest 

capitalization if the prohibition is lifted. 

All FICUs that answered the question 

stated that they would use the tool to 

varying degrees largely dependent on its 

suitability for individual borrowers. 

The NCUA asked what risks might 

arise either to the FICU or the borrower 

in a mortgage modification that includes 

capitalization of interest. Of those that 

answered the question, one commenter 

stated that the risks would include a 

lack of understanding on the member’s 

part of what interest capitalization 

means for their loan and there could be 

risk to the FICU if interest is capitalized 

on loans that already have high loan-tovalue ratios. This commenter noted, 

however, that such risks could be 

effectively mitigated by the FICU 

providing clear communication to its 

members and reviewing its member’s 

ability to repay the modified loan. Some 

stated that the consumer protection 

guardrails in the proposed rule would 

help mitigate any consumer protection 

risks. Others noted that the risk of not 

permitting interest capitalization 

needed to be weighed against any 

potential risk in permitting the practice. 

Some commenters noted that they 

evaluate each member’s situation 

individually and did not anticipate any 

risks to the FICU or the member. 

The NCUA asked how the limitations 

imposed by the GSEs on the use of 

interest capitalization would impact a 

credit union’s use of this mortgage 

modification tool. Those that answered 

this question stated that the impact 

would be minimal. One FICU stated that 

they already underwrite to Fannie Mae 

guidelines and are aware of the 

limitations. One commenter stated that 

loans that feature interest capitalization 

would not be loans that it would sell on 

the secondary market. Another stated 

that its recent sales to the GSEs were all 

newly originated and that a loan 

requesting forbearance between 

origination date and sale date is 

expected to occur so infrequently that it 

would be of no concern. 

NCUA Response. The NCUA 

appreciates the thoughtful comments 

submitted in response to the first four 

questions posed in the preamble to the 

December 4, 2020, proposed rule. The 

comments indicate that interest 

capitalization was used prior to the 

2012 change in policy, and that it will 

likely again be used following the 

issuance of this final rule. Accordingly, 

the Board continues to believe that the 

capitalization of interest, when used 

prudently, can be a helpful loan 

modification tool in the best interests of 

members and FICUs. In response to the 

commenters concerned the change may 

raise risks for consumers, the Board 

reiterates that the consumer protection 

measures that currently apply to FICU 

loan workout policies also apply to loan 

workouts involving the capitalization of 

interest. In addition, as provided in the 

proposed rule, the Board is adding 

several consumer protection 

requirements that will apply to loan 

workouts involving the capitalization of 

interest. 

Comment: Consumer Protection 

Guardrails. NCUA question 5 asked 

commenters to provide their feedback 

on the consumer protection guardrails 

and documentation requirements in the 

proposed rule. The proposed rule states 

that capitalization of interest is not an 

appropriate solution in all cases and, as 

Appendix B currently provides, a FICU 

should consider and balance the best 

interests of the FICU and the borrower. 

The Board proposed adding several 

consumer protection and safety and 

soundness requirements to the 

Appendix for FICUs that capitalize 

interest in connection with loan 

workouts. At a minimum, if a FICU’s 

loan modification policy permits 

capitalization of unpaid interest, under 

the proposed rule, the policy would 

have to require documentation that 

reflects a borrower’s ability to repay, a 

borrower’s source(s) of repayment, and 

when appropriate, compliance with the 

FICU’s valuation policies at the time the 

modification is approved. 

Of the commenters that referenced the 

documentation requirements, 17 stated 

that they support them. Some of these 

commenters, however, asked for 

clarification or suggested changes to 

certain aspects of the requirements. For 

example, one of the commenters 

suggested additional consumer 

guardrails to prohibit changes in loan 

terms such as interest rates or punitive 

fees established in the existing loan 

contract. Another commenter asked for 

clarification as to whether the proposed 

consumer protections would apply to all 

loan types, including business and 

commercial, or just consumer loans. 

Another commented that NCUA should 

strive for balance so that administrative 

burdens do not outweigh member 

benefits and noted that temporary 

income impairment may prevent a 

member from providing the 

documentary proof that examiners 

traditionally expect. Finally, one of 

these commenters added that NCUA 

examiners should refrain from adding 

documentation requirements beyond 

those in the proposed rule and, absent 

a safety and soundness issue, should 

also defer to the judgment of the FICU 

and its understanding of a borrower’s 

ability to repay the loan. 

Four commenters stated that existing 

consumer protection measures are 

sufficient to protect and inform 

members, including two whose specific 

comments are set forth below. One 

commenter stated that the requirement 

to document a borrower’s ability to 

repay would be problematic with 

COVID-related loans due to the 

enormous volume of members 

requesting COVID-related assistance. 

For example, if the FICU is capitalizing 

interest it would be increasing the 

current loan amount to avoid delays and 

unnecessary paperwork. Furthermore, if 

the new loan amount does not exceed 

110 percent of the original loan amount 

then the FICU does not need to verify 

income or request a new appraisal. In 

these situations, a certification from the 

borrower that his/her income has not 

decreased from the time the loan was 

originally approved should suffice. 

Therefore, the NCUA should waive the 

‘‘ability-to-repay’’ documentation 

requirements in these instances. 

The second commenter stated that the 

revisions required of a FICU’s 

modification policy are so burdensome 

that they will deter many FICUs from 

offering interest capitalization because 

the requirements effectively require 

FICUs to complete a full underwriting of 

a modified loan multiple times. The 

commenter stated that the NCUA’s 

existing rule already requires credit 

unions to make loan workout decisions 

based on a borrower’s renewed 

willingness and ability to repay the loan 

and if a loan workout is granted then the 

credit union must document the 

determination that the borrower is 

willing and able to repay the loan. This 

existing requirement thus fulfils the 

ability to repay and documentation 

requirements while recognizing the 

need for flexibility. 

The commenter stated that the 

existing rule also enables FICUs to 

respond to large-scale, short-term 

financial challenges arising, for 


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7The proposed rule states in the regulatory text: 

‘‘Modifications of loans that result in capitalization 

of unpaid interest are appropriate only when the 

borrower has the ability to repay the debt in 

accordance with the modification. At a minimum, 

if a FICU’s loan modification policy permits 

capitalization of unpaid interest, the policy must 

require each of the following . . .’’ (Supra note 1, 

at 78272). 

8See 12 CFR part 741, Appendix B, section 

captioned ‘‘Written Loan Workout Policy and 

Monitoring Requirements.’’ 

example, from natural disasters such as 

hurricanes, temporary gaps in 

employment, or the current pandemic 

which may make it difficult to access 

documentation, even though the FICU 

reasonably determines that the 

borrower’s mid- to long-term income 

prospects remain intact. 

Finally, the commenter stated that the 

way the proposed rule is drafted implies 

that these additional documentation 

requirements would apply to all 

modification types if the credit union 

merely permits interest capitalization.7

NCUA Response. The Board 

appreciates the support expressed by 

the large majority of commenters for the 

proposed consumer protection 

guardrails. The final rule adopts these 

consumer protection measures without 

change. 

Appendix B applies to consumer and 

commercial loans. The rule requires that 

loan modification policies must provide 

for ‘‘[c]ompliance with all applicable 

consumer protection laws and 

regulations.’’ The term ‘‘applicable’’ 

indicates that FICUs must comply with 

the laws and regulations that apply to a 

particular transaction. While some of 

those, such as the Equal Credit 

Opportunity Act, might apply to a 

commercial loan, most will not. 

As noted, one of the comments 

suggested additional consumer 

guardrails to prohibit changes to interest 

rates or fees. The Board designed the 

proposed rule to provide FICUs greater 

flexibility when restructuring an 

existing loan. However, the proposed 

rule requires that, when doing so, a 

FICU must consider whether the loan 

modification is well-designed and 

provides a favorable outcome for 

borrowers. While a fair consideration of 

a borrower’s circumstances would 

generally not support an increase to 

interest rates or fees, the Board believes 

the language of the proposed rule 

provides the desired protections and 

declines to change it at this time. 

In response to the commenters who 

raised concerns that compliance with 

the new requirements might be 

burdensome, the Board notes that the 

consumer protection guardrails added 

by this rule apply solely to loan 

modifications that involve the 

capitalization of interest. FICUs will 

therefore not be required to comply with 

the additional documentation 

requirements for other types of loan 

modifications. In addition, several of the 

guardrails reflect current best practices 

and requirements that should not 

impose any additional significant 

burden on credit unions. For example, 

credit unions are already required to 

comply with all applicable consumer 

protections laws and regulations. The 

guardrails reiterate the need for 

compliance to emphasize the 

importance of these legal consumer 

protections. Likewise, FICUs are already 

assumed to undertake the necessary due 

diligence to ensure a borrower’s ability 

to repay. For example, Appendix B 

currently requires that a FICU’s loan 

modification policy ‘‘must also ensure 

credit unions make loan workout 

decisions based on the borrower’s 

renewed willingness and ability to 

repay the loan.’’ 8 The Board also notes 

that the rule does not prescribe a 

specific method for making this 

determination, thereby providing credit 

unions with a large degree of flexibility 

in meeting the requirement. The rule 

requires only that FICUs maintain 

documentation reflecting how the 

determination was made. 

Comment: Prohibition on Advancing 

Credit Union Fees and Commissions. 

Seventeen commenters responded to 

question 6 regarding whether NCUA 

should lift the current prohibition on 

the capitalization of credit union fees 

and commissions. 

The commenters in support of 

maintaining the prohibition stated that 

they did not deem it necessary to charge 

such fees or feel that it was appropriate 

to charge internal fees to members who 

are struggling. They noted that 

continuing to prohibit the practice is an 

important consumer protection. One of 

the commenters stated that in the event 

the NCUA did decide to authorize the 

capitalization of credit union fees and 

commissions, appropriate limitations 

should be put in place, without which 

the potential for predatory behavior and 

risk to the member-borrower may be 

heightened. 

Two commenters in support of 

removing the prohibition stated that 

FICUs should have the ability to charge 

reasonable modification fees so long as 

those fees are disclosed. One stated that 

FICUs have an incentive to not 

overburden the member with excessive 

workout-related fees to help the member 

repay the loan. Another commenter 

stated that if the NCUA chose not to 

allow all FICU fees to be capitalized, it 

should consider allowing the 

capitalization of fees up to a certain 

level. Another stated that for consumer 

protection purposes any fees charged for 

a modification involving interest 

capitalization should not be 

commissionable and that fees should be 

limited to actual costs incurred. 

One FCU commenter stated that its 

mortgage modifications are handled by 

a third-party service provider which 

charges a fee for each modification. If 

the fee cannot be capitalized and the 

borrower cannot afford to pay it as a 

direct charge, the FCU’s only 

alternatives are to deny the modification 

or absorb the cost. This commenter was 

the only one to provide some data 

regarding the actual cost of modification 

fees. Prior to 2012, when interest 

capitalization was permitted, the cost to 

this FCU for the modification of 170 

mortgage loans would have been 

approximately $42,500. If the cost to the 

FCU of managing the program and 

operating its loan system were included, 

the cost more than doubled. The FCU 

further noted that the fees are the 

reimbursement of costs and not a 

revenue generation opportunity. 

NCUA Response. Having reviewed the 

comments, the Board is not persuaded 

that FICUs should be permitted to 

capitalize credit union fees and 

commissions at this time. Most 

commenters advocating for the change 

did not include any discussion of how 

borrowers would be protected from 

excessive fees or supply any data on the 

actual cost to FICUs of providing loan 

workouts with interest capitalization. 

The final rule continues to permit FICUs 

to make advances covering third-party 

fees, such as force-placed insurance or 

property taxes. The Board, however, 

continues to believe that the current 

restrictions on fee reimbursement have 

provided a level of protection for 

borrowers in distress. The Board agrees 

with the comment that it would be 

contrary to the purposes of the credit 

union system to capitalize internally 

generated fees and commissions in a 

time of economic stress. Accordingly, 

credit union fees and commissions must 

be paid directly by the borrower at the 

time of the modification and not added 

to the loan balance. 

C. Other Issues Raised by Commenters 

Comment: Federal Preemption of 

State Consumer Protection Laws. Two 

commenters raised state preemption 

issues. Both commenters asked the 

NCUA to clarify that the proposed rule’s 

requirement that all FICUs follow 

applicable state consumer protection 

laws does not override its regulation 

preempting state law on issues 


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9As provided in § 701.21(a), certain provisions of 

§ 701.21 apply to FISCUs as specified in § 741.23; 

however, the part 741 provision does not make 

§ 701.21(b)(1)(ii)(B) applicable to FISCUs. 

10See generally the NCUA Examiner’s Guide, for 

more information regarding the agency’s 

examination process, including examination 

findings and DORs. The Guide is available at: 

https://publishedguides.ncua.gov/examiner/Pages/ 

default.htm#ExaminersGuide/ 

Home.htm%3FTocPath%3D_1. 

11Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 

(1988). 

12 Interagency Examiner Guidance for Assessing 

Safety and Soundness Considering the Effect of the 

COVID–19 Pandemic on Institutions (June 2020), 

page 6, available at https://www.ncua.gov/files/ 

press-releases-news/examiner-guidance-covid19- 

effect.pdf. 

13 Id. 

14See Federal Accounting Standards Board 

(FASB) Accounting Standards Codification (ASC) 

310–40, Receivables—Troubled Debt Restructurings 

by Creditors, available at https://asc.fasb.org/ 

subtopic&trid=2196892. 

15See section 202(b)(6)(C)(i) of the Federal Credit 

Union Act (12 U.S.C. 1782(b)(6)(C)(i)). 

16 Interagency Statement on Loan Modifications 

and Reporting for Financial Institutions Working 

with Customers Affected by the Coronavirus 

(Revised) (April 7, 2020), available at: https://

www.ncua.gov/files/press-releases-news/ 

interagency-statement-tdr-policy-revised.pdf. 

pertaining to ‘‘terms of repayment’’ (12 

CFR 701.21(b)(1)(ii)(B)). Both 

commenters noted that some states 

prohibit the charging of interest on 

interest which if not preempted will 

dampen the effectiveness of NCUA’s 

proposed rule. 

NCUA Response: As an initial matter, 

the NCUA notes that the part 701 

regulations, including § 701.21, 

generally apply solely to FCUs. 

Federally insured, state-chartered credit 

unions (FISCUs) must follow any 

requirements established by their State 

regarding the terms of repayment.9 With 

respect to FCUs, this final rule does not 

in any way amend the regulation 

regarding the relationship between State 

law and the NCUA’s regulations on 

loans made to members and lines of 

credit (12 CFR 701.21). The Board is not 

inclined to provide a blanket 

preemption of any or all State laws that 

may relate to capitalization of interest. 

FCUs may need to evaluate the 

application of relevant state laws on a 

case-by-case basis and may contact the 

NCUA for its opinion in the event a 

particular State law raises a preemption 

issue. 

Comment: Retroactive Applicability. 

Two commenters asked that the NCUA 

apply the rule retroactively. One stated 

that NCUA should make January 1, 

2020, the effective date to fully capture 

the economic disruption caused by the 

pandemic. The other commenter stated 

that in the interests of fairness if a credit 

union has already been capitalizing 

interest on loans without receiving an 

examination finding or Document of 

Resolution (DOR),10 then examiners 

should not take corrective action for 

these practices once the rule is 

finalized. 

NCUA Response. The Board has not 

revised the rule in response to these 

comments. The Board notes that, as a 

legal matter, agencies may not generally 

adopt retroactive rules without explicit 

congressional authorization.11

Accordingly, this final rule will apply 

prospectively upon issuance. The 

Board, however, is cognizant of the 

extraordinary nature of the COVID–19 

pandemic, and the resulting stresses 

that have been placed on FICUs and 

their members. In their June 2020 

interagency examiner guidance, the 

NCUA and the other banking agencies 

noted that loan modifications are 

‘‘positive actions that can mitigate 

adverse effects on borrowers due to the 

pandemic.’’ 12 The interagency guidance 

specifies that ‘‘[e]xaminers will not 

criticize institutions for working with 

borrowers as part of a risk mitigation 

strategy intended to improve existing 

loans, even if the restructured loans 

have or develop weaknesses that 

ultimately result in adverse credit 

classification.’’ 13 The NCUA will take 

into account the interagency examiner 

guidance in assessing any loan 

modification actions taken by credit 

unions, including interest 

capitalization, prior to the effective date 

of this final rule. 

Comment: Troubled Debt 

Restructuring. One commenter stated 

that the NCUA should emphasize, either 

in the regulation or in supervisory 

guidance, the importance of a FICU 

update to its troubled debt restructuring 

(TDR) policy because a TDR policy that 

harmonizes interest capitalization and 

other accounting tools is essential if 

NCUA’s proposed rule is to achieve its 

full, intended effect. 

NCUA Response. The Board 

appreciates this comment and agrees 

that FICUs should update their TDR 

policies as necessary to maintain 

consistency with applicable 

requirements. TDRs are a concept found 

in generally accepted accounting 

principles (GAAP),14 which FICUs are 

generally required to follow pursuant to 

section 202 of the FCU Act.15 The 

NCUA and the other banking agencies 

most recently issued guidance regarding 

TDRs on April 7, 2020. The April 7, 

2020, interagency statement is designed 

to assist financial institutions that are 

working with borrowers affected by 

COVID–19.16 The NCUA is not revising 

any TDR requirements through this 

rulemaking. 

IV. This Final Rule 

A. Capitalization of Interest 

The Board is amending Appendix B to 

remove the prohibition on the 

capitalization of interest in connection 

with loan workouts and modifications. 

As noted, the change applies to 

workouts of all types of member loans, 

including commercial and business 

loans. The NCUA also notes that— 

consistent with the scope of Appendix 

B—the regulatory amendments made by 

this final rule apply only to loan 

modifications involving the 

capitalization of interest. The final rule 

does not address the capitalization of 

interest that may occur in other 

contexts. The Board notes that banks 

frequently include interest 

capitalization as one of several 

components in a loan restructuring to 

mutually benefit the lender and the 

borrower. The Board expects that FICUs 

will follow suit, and provide borrowers 

with the option to capitalize interest 

along with other loan modification 

options, such as the lowering of loan 

payments or the interest rate, extending 

the maturity date, partial principal or 

interest forgiveness and other 

modifications. 

The final rule adds a definition of 

capitalized interest to the Glossary of 

Appendix B. For the purposes of this 

rulemaking, capitalization of interest 

constitutes the addition of accrued but 

unpaid interest to the principal balance 

of a loan. 

The final rule continues to provide 

that a FICU may not, under any event, 

authorize additional advances to finance 

credit union fees and commissions. 

FICUs will be permitted to continue to 

make advances to cover third party fees 

to protect loan collateral, such as forceplaced insurance or property taxes. The 

Board believes that maintaining the 

prohibition on the capitalization of 

credit union fees is an important 

consumer protection feature of the rule 

for member borrowers. 

The Board underscores that it is 

maintaining several requirements that 

apply to all loan workout policies in 

Appendix B. For example, the 

Appendix establishes the expectation 

that loan workouts will consider and 

balance the best interests of the FICU 

and the borrower, including consumer 

financial protection measures. Ensuring 

the best interest of the borrower 

prohibits predatory lending practices 

such as including loan terms that result 

in negative amortization. In addition, a 

FICU’s policy must establish limits on 


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34616 Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 

17 81 FR 13530 (Mar. 14, 2016) (https://

www.govinfo.gov/content/pkg/FR-2016-03-14/pdf/ 

2016-03955.pdf). 

18 5 U.S.C. 603(a). 

19 80 FR 57512 (Sept. 24, 2015) (https://

www.govinfo.gov/content/pkg/FR-2015-09-24/pdf/ 

2015-24165.pdf). 

the number of modifications allowed for 

an individual loan. Further, the policy 

must ensure that a FICU make loan 

workout decisions based on a 

borrower’s renewed willingness and 

ability to repay the loan. 

If a FICU restructures a loan more 

frequently than once a year or twice in 

five years, examiners will have higher 

expectations for the documentation of 

the borrower’s renewed willingness and 

ability to repay the loan. The current 

Appendix also sets forth several 

supervisory expectations relating to 

multiple restructurings, stating that 

examiners will request validation 

documentation regarding collectability 

if a FICU engages in multiple 

restructurings of a loan. The current 

Appendix also requires that a FICU 

maintain sufficient documentation to 

demonstrate that the FICU’s personnel 

communicated the new terms with the 

borrower, that the borrower agreed to 

pay the loan in full under the new terms 

and, most importantly, the borrower has 

the ability to repay the loan under the 

new terms. 

These requirements and expectations, 

which currently apply to FICUs’ loan 

workout policies, will apply equally if 

a FICU adopts a practice of capitalizing 

interest in connection with loan 

workouts. In addition, in light of the 

potential for interest capitalization to 

have a detrimental effect on borrowers 

if executed inappropriately, and to mask 

the true financial status of a loan and a 

credit union’s financial statements, the 

Board is adding requirements to the 

Appendix to apply to FICUs that engage 

in this practice. 

Modifications of loans that result in 

capitalization of unpaid interest are 

appropriate only when the borrower has 

the ability to repay the debt in 

accordance with the modification. At a 

minimum, if a FICU’s loan modification 

policy permits capitalization of unpaid 

interest, the policy must require each of 

the following: 

1. Compliance with all applicable 

consumer protection laws and 

regulations, including, but not limited 

to, the Equal Credit Opportunity Act, 

the Fair Housing Act, the Truth In 

Lending Act, the Real Estate Settlement 

Procedures Act, the Fair Credit 

Reporting Act, and the prohibitions 

against the use of unfair, deceptive or 

abusive acts or practices contained in 

the Consumer Financial Protection Act 

of 2010. (The Board notes that FICUs are 

also expected to comply with applicable 

State consumer protection laws that, in 

some instances, may be more stringent 

than Federal law, prohibiting, for 

example, the charging of interest on 

interest, subject to any case-by-case 

Federal preemption determinations that 

may be appropriate.) 

2. Documentation that reflects a 

borrower’s ability to repay, a borrower’s 

source(s) of repayment, and when 

appropriate, compliance with the 

FICU’s valuation policies at the time the 

modification is approved. 

3. Providing borrowers with 

documentation that is accurate, clear, 

and conspicuous and consistent with 

Federal and state consumer protection 

laws. 

4. Appropriate reporting of loan status 

for modified loans in accordance with 

applicable law and accounting 

practices. The FICU shall not report a 

modified loan as past due if the loan 

was current prior to modification and 

the borrower is complying with the 

terms of the modification. 

5. Prudent policies and procedures to 

help borrowers resume affordable and 

sustainable repayments that are 

appropriately structured, while at the 

same time minimizing losses to the 

credit union. The prudent policies and 

procedures must consider: 

i. Whether the loan modifications are 

well-designed, consistently applied, and 

provide a favorable outcome for 

borrowers. 

ii. The available options for borrowers 

to repay any missed payments at the 

end of their modifications to avoid 

delinquencies or other adverse 

consequences. 

6. Appropriate safety and soundness 

safeguards to prevent the following: 

i. Masking deteriorations in loan 

portfolio quality and understating 

charge-off levels; 

ii. Delaying loss recognition resulting 

in an understated allowance for loan 

and lease losses account or inaccurate 

loan valuations; 

iii. Overstating net income and net 

worth (regulatory capital) levels; and 

iv. Circumventing internal controls. 

B. Technical Updates to Appendix B 

The Board also took this opportunity 

to propose several technical changes to 

Appendix B to improve its clarity and 

update certain references. No 

commenters opposed these changes, and 

the Board is adopting them as proposed. 

For example, the final rule updates 

references to the NCUA’s or other 

guidance in the Appendix, such as 

guidance or standards issued by other 

federal banking agencies or the 

Financial Accounting Standards Board 

(FASB). These changes are intended to 

provide current information, and are not 

substantive policy changes. 

In May 2014, FASB issued an 

accounting standard update for revenue 

recognition (ASU 2014–09) which 

replaced the cost recovery method of 

income recognition in ASC 605–10–25– 

4 with transition guidance found in ASC 

606—Revenue from Contracts with 

Customers. The (2012) Appendix made 

reference to the cost recovery method of 

income recognition with citation in the 

Glossary. As this has been superseded 

by ASC 606, the Board has eliminated 

this reference in the Appendix and 

emphasizes that accrual of interest 

income ceases on a financial asset when 

full payment of principal and interest in 

cash is not expected. 

In addition, to conform to the 

terminology that the Board adopted in 

2016 in amending part 723,17 the final 

rule updates references to member 

business loans to also refer to 

commercial loans. These changes are 

not intended to create new requirements 

or standards. 

The final rule also makes terminology 

in the Appendix consistent with its 

purpose. The Appendix sets forth 

requirements for FICU policies relating 

to loan workouts, TDRs, and nonaccrual 

status. In several instances, the current 

Appendix uses the word ‘‘should’’ when 

referring to necessary elements of a 

FICU’s policies or refers to the 

Appendix as ‘‘guidance’’ or an 

interpretive ruling and policy statement. 

To make the purpose and effect of the 

Appendix clearer, the final rule uses 

mandatory language where appropriate 

and eliminates references to the 

Appendix as ‘‘guidance.’’ 

Finally, the Board clarified several 

statements of the Appendix to make it 

more consistent with plain language 

principles. 

None of these changes were 

substantive and were outlined for 

commenters in a redlined copy of the 

Appendix that the agency made 

available in the rulemaking docket. 

V. Regulatory Procedures 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires the NCUA to prepare an 

analysis to describe any significant 

economic impact a regulation may have 

on a substantial number of small 

entities.18 For purposes of this analysis, 

the NCUA considers small credit unions 

to be those having under $100 million 

in assets.19 The final rule allows FICUs 

to capitalize unpaid interest when 

working with borrowers. The final rule 


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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 34617 

20Public Law 105–277, 112 Stat. 2681 (1998). 

21 5 U.S.C. 551. 

1Terms defined in the Glossary will be italicized 

on their first use in the body of this =Appendix. 

2For additional guidance on commercial and 

member business lending extension, deferral, 

renewal, and rewrite policies, see Interagency 

Policy Statement on Prudent Commercial Real 

Estate Loan Workouts (October 30, 2009) 

transmitted by Letter to Credit Unions No. 10–CU– 

07, and available at http://www.ncua.gov. 

3Broad based credit union programs commonly 

used as a member benefit and implemented in a 

safe and sound manner limited to only accounts in 

good standing, such as Skip-a-Pay programs, are not 

intended to count toward these limits. 

4 In developing a written policy, the credit union 

board and management may wish to consider 

similar parameters as those established in the 

FFIEC’s ‘‘Uniform Retail Credit Classification and 

Account Management Policy’’ (FFIEC Policy). 65 FR 

36903 (June 12, 2000) (https://www.govinfo.gov/ 

content/pkg/FR-2000-06-12/pdf/00-14704.pdf). The 

FFIEC Policy sets forth specific limitations on the 

number of times a loan can be re-aged (for openend accounts) or extended, deferred, renewed or 

rewritten (for closed-end accounts). NCUA Letter to 

Credit Unions (LCU) 09–CU–19, ‘‘Evaluating 

Residential Real Estate Mortgage Loan Modification 

Programs,’’ also outlines policy best practices for 

real estate modifications (https://www.ncua.gov/ 

regulation-supervision/letters-credit-unions-otherContinued 

is not expected to increase the cost 

burden for FICUs. Accordingly, the 

NCUA certifies that the final rule will 

not have a significant economic impact 

on a substantial number of small credit 

unions. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) (44 U.S.C. 3501 et seq.) requires 

that the Office of Management and 

Budget (OMB) approve all collections of 

information by a Federal agency from 

the public before they can be 

implemented. Respondents are not 

required to respond to any collection of 

information unless it displays a valid 

OMB control number. In accordance 

with the PRA, the information 

collection requirements included in this 

final rule have been submitted to OMB 

for approval under control number 

3133–0092. 

C. Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

state and local interests. In adherence to 

fundamental federalism principles, the 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5), 

voluntarily complies with the executive 

order. This rulemaking will not have a 

substantial direct effect on the states, on 

the connection between the National 

Government and the states, or on the 

distribution of power and 

responsibilities among the various 

levels of government. The NCUA has 

determined that this final rule does not 

constitute a policy that has federalism 

implications for purposes of the 

executive order. 

D. Assessment of Federal Regulations 

and Policies on Families 

The NCUA has determined that this 

final rule will not affect family wellbeing within the meaning of Section 654 

of the Treasury and General 

Government Appropriations Act, 

1999.20

E. Small Business Regulatory 

Enforcement Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 

(SBREFA) 21 generally provides for 

congressional review of agency rules. A 

reporting requirement is triggered in 

instances where the NCUA issues a final 

rule as defined by section 551 of the 

Administrative Procedure Act. An 

agency rule, in addition to being subject 

to congressional oversight, may also be 

subject to a delayed effective date if the 

rule is a ‘‘major rule.’’ The NCUA does 

not believe this rule is a ‘‘major rule’’ 

within the meaning of the relevant 

sections of SBREFA. As required by 

SBREFA, the NCUA will submit this 

final rule to OMB for it to determine if 

the final rule is a ‘‘major rule’’ for 

purposes of SBREFA. The NCUA also 

will file appropriate reports with 

Congress and the Government 

Accountability Office so this rule may 

be reviewed. 

List of Subjects in 12 CFR Part 741 

Credit, Credit unions, Share 

insurance. 

By the National Credit Union 

Administration Board on June 24, 2021. 

Melane Conyers-Ausbrooks, 

Secretary of the Board. 

For the reasons discussed in the 

preamble, the Board amends 12 CFR 

part 741 as follows: 

PART 741—REQUIREMENTS FOR 

INSURANCE 

■ 1. The authority citation for part 741 

continues to read as follows: 

Authority: 12 U.S.C. 1757, 1766(a), 1781– 

1790, and 1790d; 31 U.S.C. 3717. 

■ 2. Appendix B to Part 741 is revised 

to read as follows: 

Appendix B to Part 741—Loan 

Workouts, Nonaccrual Policy, and 

Regulatory Reporting of Troubled Debt 

Restructured Loans 

This Appendix establishes requirements 

for the management of loan workout 1

arrangements, loan nonaccrual, and 

regulatory reporting of troubled debt 

restructured loans (herein after referred to as 

TDR or TDRs). This Appendix applies to all 

federally insured credit unions. 

Under this Appendix, TDRs are as defined 

in generally accepted accounting principles 

(GAAP), and the Board does not intend to 

change the Financial Accounting Standards 

Board’s (FASB) definition of TDR in any way 

through this policy. In addition to existing 

agency policy, this Appendix sets the 

NCUA’s supervisory expectations governing 

loan workout policies and practices and loan 

accruals. 

Written Loan Workout Policy and 

Monitoring Requirements 2

For purposes of this Appendix, types of 

workout loans to borrowers in financial 

difficulties include re-agings, extensions, 

deferrals, renewals, or rewrites. See the 

Glossary entry on workouts for further 

descriptions of each term. Borrower retention 

programs or new loans are not encompassed 

within this policy nor considered by the 

Board to be workout loans. 

A credit union can use loan workouts to 

help borrowers overcome temporary financial 

difficulties such as loss of job, medical 

emergency, or change in family 

circumstances such as the loss of a family 

member. Loan workout arrangements must 

consider and balance the best interests of 

both the borrower and the credit union. 

The lack of a sound written policy on 

workouts can mask the true performance and 

past due status of the loan portfolio. 

Accordingly, the credit union board and 

management must adopt and adhere to an 

explicit written policy and standards that 

control the use of loan workouts, and 

establish controls to ensure the policy is 

consistently applied. The loan workout 

policy and practices should be 

commensurate with a credit union’s size and 

complexity, and must conform with a credit 

union’s broader risk mitigation strategies. 

The policy must define eligibility 

requirements (that is, under what conditions 

the credit union will consider a loan 

workout), including establishing limits on 

the number of times an individual loan may 

be modified.3 The policy must also ensure 

credit unions make loan workout decisions 

based on a borrower’s renewed willingness 

and ability to repay the loan. If a credit union 

restructures a loan more frequently than once 

a year or twice in five years, examiners will 

have higher expectations for the 

documentation of the borrower’s renewed 

willingness and ability to repay the loan. The 

NCUA is concerned about restructuring 

activity that pushes existing losses into 

future reporting periods without improving a 

loan’s collectability. One way a credit union 

can provide convincing evidence that 

multiple restructurings improve collectability 

is to validate completed multiple 

restructurings that substantiate the claim. 

Examiners will ask for such validation 

documentation if a credit union engages in 

multiple restructurings of a loan. 

In addition, the policy must establish 

sound controls to ensure loan workout 

actions are appropriately structured.4 The 


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34618 Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 

guidance/evaluating-residential-real-estatemortgage-loan-modification-programs). Those best 

practices remain applicable to real estate loan 

modifications (with the exception to the 

capitalization of credit union fees) but could be 

adapted in part by the credit union in their written 

loan workout policy for other loans. 

5Refer to NCUA guidance on charge-offs set forth 

in LCU 03–CU–01, ‘‘Loan Charge-off Guidance,’’ 

dated January 2003 (https://www.ncua.gov/ 

regulation-supervision/letters-credit-unions-otherguidance/loan-charge-guidance). Examiners will 

require that a reasonable written charge-off policy 

is in place and that it is consistently applied. 

Additionally, credit unions need to adjust historical 

loss factors when calculating ALLL needs for 

pooled loans to account for any loans with 

protracted charge-off timeframes (for example, 12 

months or more). See discussions on the latter point 

in the 2006 Interagency ALLL Policy Statement 

transmitted by Accounting Bulletin 06–1 (December 

2006) (https://www.ncua.gov/regulationsupervision/letters-credit-unions-other-guidance/ 

interagency-advisory-addressing-alll-key-conceptsand-requirements). Upon implementation of ASC 

326—Financial Instruments—Credit Losses, credit 

unions will use the guidance in Interagency Policy 

Statement on Allowances for Credit Losses (May 

2020) (https://www.ncua.gov/files/press-releasesnews/policy-statement-allowances-creditlosses.pdf). 

6Subsequent Call Reports and accompanying 

instructions will reflect this policy, including 

focusing data collection on loans meeting the 

definition of TDR under GAAP. In reporting TDRs 

on regulatory reports, the data collections will 

include all TDRs that meet the GAAP criteria for 

TDR reporting, without the application of 

materiality threshold exclusions based on scoping 

or reporting policy elections of credit union 

preparers or their auditors. Credit unions should 

also refer to ASC Subtopic 310–40 when 

determining if a restructuring of a debt constitutes 

a TDR. 

7Placing a loan in nonaccrual status does not 

change the loan agreement or the obligations 

between the borrower and the credit union. Only 

the parties can effect a restructuring of the original 

loan terms or otherwise settle the debt. 

8The federal banking agencies are the Board of 

Governors of the Federal Reserve System, the 

Federal Deposit Insurance Corporation, and the 

Office of the Comptroller of the Currency. 

9FFIEC Report of Condition and Income Forms, 

Instructions and Supplemental Instructions, https:// 

www.ffiec.gov/forms041.htm. 

10Nonaccrual of interest also includes the 

amortization of deferred net loan fees or costs, or 

the accretion of discount. Nonaccrual of interest on 

loans past due 90 days or more is a longstanding 

agency policy and credit union practice. 

11A purchased credit impaired loan asset need 

not be placed in nonaccrual status as long as the 

criteria for accrual of income under the interest 

method in GAAP is met. Also, the accrual of 

interest on workout loans is covered in a later 

section of this Appendix. 

12Acceptable accounting treatment includes a 

reversal of all previously accrued, but uncollected, 

interest applicable to loans placed in a nonaccrual 

status against appropriate income and balance sheet 

accounts. For example, one acceptable method of 

accounting for such uncollected interest on a loan 

placed in nonaccrual status is to reverse all of the 

unpaid interest by crediting the ‘‘accrued interest 

receivable’’ account on the balance sheet; to reverse 

the uncollected interest that has been accrued 

during the calendar year-to-date by debiting the 

appropriate ‘‘interest and fee income on loans’’ 

account on the income statement, and to reverse 

any uncollected interest that had been accrued 

policy must explicitly prohibit the 

authorization of additional advances to 

finance credit union fees and commissions. 

The credit union may, however, make 

advances to cover third-party fees, such as 

force-placed insurance or property taxes. For 

loan workouts granted, a credit union must 

document the determination that the 

borrower is willing and able to repay the 

loan. 

Modifications of loans that result in 

capitalization of unpaid interest are 

appropriate only when a borrower has the 

ability to repay the debt. At a minimum, if 

a FICU’s loan modification policy permits 

capitalization of unpaid interest, the policy 

must require: 

1. Compliance with all applicable federal 

and state consumer protection laws and 

regulations, including, but not limited to, the 

Equal Credit Opportunity Act, the Fair 

Housing Act, the Truth In Lending Act, the 

Real Estate Settlement Procedures Act, the 

Fair Credit Reporting Act, and the 

prohibitions against the use of unfair, 

deceptive or abusive acts or practices in the 

Consumer Financial Protection Act of 2010. 

2. Documentation that reflects a borrower’s 

ability to repay, a borrower’s source(s) of 

repayment, and when appropriate, 

compliance with the FICU’s valuation 

policies at the time the modification is 

approved. 

3. Providing borrowers with written 

disclosures that are accurate, clear and 

conspicuous and that are consistent with 

Federal and state consumer protection laws. 

4. Appropriate reporting of loan status for 

modified loans in accordance with applicable 

law and accounting practices. The FICU shall 

not report a modified loan as past due if the 

loan was current prior to modification and 

the borrower is complying with the terms of 

the modification. 

5. Prudent policies and procedures to help 

borrowers resume affordable and sustainable 

repayments that are appropriately structured, 

while at the same time minimizing losses to 

the credit union. The prudent policies and 

procedures must consider 

i. Whether the loan modifications are welldesigned, consistently applied, and provide a 

favorable outcome for borrowers. 

ii. The available options for borrowers to 

repay any missed payments at the end of 

their modifications to avoid delinquencies or 

other adverse consequences. 

6. Appropriate safety and soundness 

safeguards to prevent the following: 

i. Masking deteriorations in loan portfolio 

quality and understating charge-off levels; 5

ii. Delaying loss recognition resulting in an 

understated allowance for loan and lease 

losses account or inaccurate loan valuations; 

iii. Overstating net income and net worth 

(regulatory capital) levels; and 

iv. Circumventing internal controls. 

The credit union’s risk management 

framework must include thresholds, based on 

aggregate volume of loan workout activity, 

which trigger enhanced reporting to the 

board of directors. This reporting will enable 

the credit union’s board of directors to 

evaluate the effectiveness of the credit 

union’s loan workout program, understand 

any implications to the organization’s 

financial condition, and make any 

compensating adjustments to the overall 

business strategy. This information will also 

be available to examiners upon request. 

To be effective, management information 

systems need to track the principal 

reductions and charge-off history of loans in 

workout programs by type of program. Any 

decision to re-age, extend, defer, renew, or 

rewrite a loan, like any other revision to 

contractual terms, must be supported by the 

credit union’s management information 

systems. Sound management information 

systems identify and document any loan that 

is re-aged, extended, deferred, renewed, or 

rewritten, including the frequency and extent 

of such action. Documentation normally 

shows that credit union personnel 

communicated with the borrower, the 

borrower agreed to pay the loan in full under 

any new terms, and the borrower has the 

ability to repay the loan under any new 

terms. 

Regulatory Reporting of Workout Loans 

Including TDR Past Due Status 

Credit unions will calculate the past due 

status of all loans consistent with loan 

contract terms, including amendments made 

to loan terms through a formal restructure. 

Credit unions will report delinquency on the 

Call Report consistent with this policy.6

Loan Nonaccrual Policy 

Credit unions must recognize interest 

income appropriately. Credit unions must 

place loans in nonaccrual status when doubt 

exists as to full collection of principal and 

interest or the loan has been in default for a 

period of 90 days or more. Upon placing a 

loan in nonaccrual, a credit union must 

reverse or charge-off previously accrued but 

uncollected interest. A nonaccrual loan may 

be returned to accrual status when a credit 

union expects repayment of the remaining 

contractual principal and interest or it is well 

secured and in process of collection.7 This 

policy on loan accrual is consistent with 

longstanding credit union industry practice 

as implemented by the NCUA over the last 

several decades. The balance of the policy 

relates to commercial and member business 

loan workouts and is similar to the policies 

adopted by the federal banking agencies 8 as 

set forth in the FFIEC Call Report for banking 

institutions and its instructions.9

Nonaccrual Status 

Credit unions may not accrue interest 10 on 

any loan where principal or interest has been 

in default for a period of 90 days or more 

unless the loan is both ‘‘well secured’’ and 

‘‘in the process of collection.’’ 11 For 

purposes of applying the ‘‘well secured’’ and 

‘‘in process of collection’’ test for nonaccrual 

status listed above, the date on which a loan 

reaches nonaccrual status is determined by 

its contractual terms. 

While a loan is in nonaccrual status, a 

credit union may treat some or all of the cash 

payments received as interest income on a 

cash basis provided no doubt exists about the 

collectability of the remaining recorded 

investment in the loan. A credit union must 

handle the reversal of previously accrued, 

but uncollected, interest applicable to any 

loan placed in nonaccrual status in 

accordance with GAAP.12


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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 34619 

during previous calendar years by debiting the 

‘‘allowance for loan and lease losses’’ account on 

the balance sheet. The use of this method presumes 

that credit union management’s additions to the 

allowance through charges to the ‘‘provision for 

loan and lease losses’’ on the income statement 

have been based on an evaluation of the 

collectability of the loan and lease portfolios and 

the ‘‘accrued interest receivable’’ account. 

13This policy is derived from the ‘‘Interagency 

Policy Statement on Prudent Commercial Real 

Estate Loan Workouts’’ the NCUA and the other 

financial regulators issued on October 30, 2009. 

Restoration to Accrual Status for All Loans 

Except Commercial and Member Business 

Loan Workouts 

A nonaccrual loan may be restored to 

accrual status when: 

• Its past due status is less than 90 days 

and the credit union expects repayment of 

the remaining contractual principal and 

interest within a reasonable period; 

• It otherwise becomes both well secured 

and in the process of collection; or 

• The asset is a purchased impaired loan 

and it meets the criteria under GAAP for 

accrual of interest income under the 

accretable yield method. See ASC 310–30. 

In restoring all loans to accrual status, if 

the credit union applied any interest 

payments received while the loan was in 

nonaccrual status to reduce the recorded 

investment in the loan, the credit union must 

not reverse the application of these payments 

to the loan’s recorded investment (and must 

not credit interest income). Likewise, a credit 

union cannot restore the accrued but 

uncollected interest reversed or charged-off 

at the point the loan was placed on 

nonaccrual status to accrual; it can only be 

recognized as income if collected in cash or 

cash equivalents from the member. 

Restoration to Accrual Status on 

Commercial and Member Business Loan 

Workouts 13

A formally restructured commercial or 

member business loan workout need not be 

maintained in nonaccrual status, provided 

the restructuring and any charge-off taken on 

the loan are supported by a current, welldocumented credit evaluation of the 

borrower’s financial condition and prospects 

for repayment under the revised terms. 

Otherwise, the restructured loan must remain 

in nonaccrual status. 

The credit union’s evaluation must include 

consideration of the borrower’s sustained 

historical repayment performance for a 

reasonable period prior to the date on which 

the loan is returned to accrual status. A 

sustained period of repayment performance 

is a minimum of six consecutive payments, 

and includes timely payments under the 

restructured loan’s terms of principal and 

interest in cash or cash equivalents. In 

returning the commercial or member 

business workout loan to accrual status, a 

credit union may consider sustained 

historical repayment performance for a 

reasonable time prior to the restructuring. 

Such a restructuring must improve the 

collectability of the loan in accordance with 

a reasonable repayment schedule and does 

not relieve the credit union from the 

responsibility to promptly charge off all 

identified losses. 

The following graph provides an example 

of a schedule of repayment performance to 

demonstrate a determination of six 

consecutive payments. If the original loan 

terms required a monthly payment of $1,500, 

and the credit union lowered the borrower’s 

payment to $1,000 through formal 

commercial or member business loan 

restructure, then based on the first row of the 

graph, the ‘‘sustained historical repayment 

performance for a reasonable time prior to 

the restructuring’’ would encompass five of 

the pre-workout consecutive payments that 

were at least $1,000 (months 1 through 5). In 

total, the six consecutive repayment burden 

would be met by the first month post 

workout (month 6). 

In the second row, only one of the preworkout payments would count toward the 

six consecutive repayment requirement 

(month 5), because it is the first month in 

which the borrower made a payment of at 

least $1,000 after failing to pay at least that 

amount. Therefore, the loan would remain on 

nonaccrual for at least five post-workout 

consecutive payments (months 6 through 10) 

provided the borrower continues to make 

payments consistent with the restructured 

terms. 

Pre-workout Post-workout 

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 

$1,500 $1,200 $1,200 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 

1,500 1,200 900 875 1,000 1,000 1,000 1,000 1,000 1,000 

After a formal restructure of a commercial 

or member business loan, if the restructured 

loan has been returned to accrual status, the 

loan otherwise remains subject to the 

nonaccrual standards of this policy. If any 

interest payments received while the 

commercial or member business loan was in 

nonaccrual status were applied to reduce the 

recorded investment in the loan the 

application of these payments to the loan’s 

recorded investment must not be reversed 

(and interest income must not be credited). 

Likewise, accrued but uncollected interest 

reversed or charged-off at the point the 

commercial or member business workout 

loan was placed on nonaccrual status cannot 

be restored to accrual; it can only be 

recognized as income if collected in cash or 

cash equivalents from the member. 

The following tables summarize 

nonaccrual and restoration to accrual 

requirements previously discussed: 

TABLE 1—NONACCRUAL CRITERIA

Action Condition identified Additional consideration 

Nonaccrual on All Loans ...... 90 days or more past due unless loan is both well-secured and in the process of collection; or 

The loan is maintained on the Cash basis because 

there is a deterioration in the financial condition of 

the borrower, or for which payment in full of principal 

or interest is not expected. 

See Glossary definitions for ‘‘well secured’’ and ‘‘in the 

process of collection.’’ 

Nonaccrual on Commercial 

or Member Business Loan 

Workouts.

Continue on nonaccrual at workout point and until restore to accrual criteria are met. See Table 2—Restore to Accrual. 


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34620 Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 

14Terms defined in the Glossary will be italicized 

on their first use in the body of this guidance. 15Acceptable accounting practices include 

allocating contractual interest payments among 

interest income, reduction of the recorded 

investment in the asset, and recovery of prior 

charge-offs. If this method is used, the amount of 

income that is recognized would be equal to that 

which would have been accrued on the loan’s 

remaining recorded investment at the contractual 

rate; and, accounting for the contractual interest in 

its entirety either as income, reduction of the 

recorded investment in the asset, or recovery of 

prior charge-offs, depending on the condition of the 

asset, consistent with its accounting policies for 

other financial reporting purposes. 

16FASB ASC 310–40, ‘‘Troubled Debt 

Restructuring by Creditors.’’ 

TABLE 2—RESTORE TO ACCRUAL

Action Condition identified Additional consideration 

Restore to Accrual on All 

Loans except Commercial 

or Member Business Loan 

Workouts.

When a loan is less than 90 days past due and the 

credit union expects repayment of the remaining contractual principal and interest within a reasonable period, or 

When it otherwise becomes both ‘‘well secured’’ and 

‘‘in the process of collection’’; or 

The asset is a purchased impaired loan and it meets 

the criteria under GAAP (see ASC 310–30) for accrual of interest income under the accretable yield 

method. 

See Glossary definitions for ‘‘well secured’’ and ‘‘in the 

process of collection.’’ Interest payments received 

while the loan was in nonaccrual status and applied 

to reduce the recorded investment in the loan must 

not be reversed and income credited. Likewise, accrued but uncollected interest reversed or charged-off 

at the point the loan was placed on nonaccrual status 

cannot be restored to accrual. 

Restore to Accrual on Commercial or Member Business Loan Workouts.Formal restructure with a current, well documented 

credit evaluation of the borrower’s financial condition 

and prospects for repayment under the revised 

terms. 

The evaluation must include consideration of the borrower’s sustained historical repayment performance 

for a minimum of six timely consecutive payments 

comprised of principal and interest. In returning a 

loan to accrual status, a credit union may take into 

account sustained historical repayment performance 

for a reasonable time prior to the restructured terms. 

Interest payments received while the commercial or 

member business loan was in nonaccrual status and 

applied to reduce the recorded investment in the loan 

must not be reversed and income credited. 

Accrued but uncollected interest reversed or chargedoff at the point the commercial or member business 

loan was placed on nonaccrual status cannot be restored to accrual. 

Glossary 14

‘‘Capitalization of Interest’’ constitutes the 

addition of accrued but unpaid interest to the 

principal balance of a loan. 

‘‘Cash Basis’’ method of income 

recognition is set forth in GAAP and means 

while a loan is in nonaccrual status, some or 

all of the cash interest payments received 

may be treated as interest income on a cash 

basis provided no doubt exists about the 

collectability of the remaining recorded 

investment in the loan.15

‘‘Charge-off’’ means a direct reduction 

(credit) to the carrying amount of a loan 

carried at amortized cost resulting from 

uncollectability with a corresponding 

reduction (debit) of the ALLL. Recoveries of 

loans previously charged off must be 

recorded when received. 

‘‘Commercial Loan’’ is defined consistent 

with Section 723.2 of the NCUA’s MEMBER 

BUSINESS LOANS; COMMERCIAL 

LENDING Rule, 12 CFR 723.2. 

‘‘Generally accepted accounting principles 

(GAAP)’’ means official pronouncements of 

the FASB as memorialized in the FASB 

Accounting Standards Codification® as the 

source of authoritative principles and 

standards recognized to be applied in the 

preparation of financial statements by 

federally insured credit unions in the United 

States with assets of $10 million or more. 

‘‘In the process of collection’’ means 

collection of the loan is proceeding in due 

course either: 

(1) Through legal action, including 

judgment enforcement procedures, or 

(2) In appropriate circumstances, through 

collection efforts not involving legal action 

which are reasonably expected to result in 

repayment of the debt or in its restoration to 

a current status in the near future, i.e., 

generally within the next 90 days. 

‘‘Member Business Loan’’ is defined 

consistent with § 723.8 of the NCUA’s 

MEMBER BUSINESS LOANS; 

COMMERCIAL LENDING Rule, 12 CFR 

723.8. 

‘‘New Loan’’ means the terms of the revised 

loan are at least as favorable to the credit 

union (i.e., terms are market-based, and profit 

driven) as the terms for comparable loans to 

other customers with similar collection risks 

who are not refinancing or restructuring a 

loan with the credit union, and the revisions 

to the original debt are more than minor. 

‘‘Past Due’’ means a loan is determined to 

be delinquent in relation to its contractual 

repayment terms including formal 

restructures, and must consider the time 

value of money. Credit unions may use the 

following method to recognize partial 

payments on ‘‘consumer credit,’’ i.e., credit 

extended to individuals for household, 

family, and other personal expenditures, 

including credit cards, and loans to 

individuals secured by their personal 

residence, including home equity and home 

improvement loans. A payment equivalent to 

90 percent or more of the contractual 

payment may be considered a full payment 

in computing past due status. 

‘‘Recorded Investment in a Loan’’ means 

the loan balance adjusted for any 

unamortized premium or discount and 

unamortized loan fees or costs, less any 

amount previously charged off, plus recorded 

accrued interest. 

‘‘Troubled Debt Restructuring’’ is as 

defined in GAAP and means a restructuring 

in which a credit union, for economic or 

legal reasons related to a member borrower’s 

financial difficulties, grants a concession to 

the borrower that it would not otherwise 

consider.16 The restructuring of a loan may 

include, but is not necessarily limited to: 

(1) The transfer from the borrower to the 

credit union of real estate, receivables from 

third parties, other assets, or an equity 

interest in the borrower in full or partial 

satisfaction of the loan, 

(2) A modification of the loan terms, such 

as a reduction of the stated interest rate, 

principal, or accrued interest or an extension 

of the maturity date at a stated interest rate 

lower than the current market rate for new 

debt with similar risk, or 

(3) A combination of the above. 

A loan extended or renewed at a stated 

interest rate equal to the current market 

interest rate for new debt with similar risk is 

not to be reported as a restructured troubled 

loan. 

‘‘Well secured’’ means the loan is 

collateralized by: (1) A perfected security 

interest in, or pledges of, real or personal 

property, including securities with an 

estimable value, less cost to sell, sufficient to 

recover the recorded investment in the loan, 

as well as a reasonable return on that 

amount, or (2) by the guarantee of a 

financially responsible party. 


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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Rules and Regulations 34621 

17 ‘‘Re-Age’’ means returning a past due account 

to current status without collecting the total amount 

of principal, interest, and fees that are contractually 

due. 

18There may be instances where a workout loan 

is not a TDR even though the borrower is 

experiencing financial hardship. For example, a 

workout loan would not be a TDR if the fair value 

of cash or other assets accepted by a credit union 

from a borrower in full satisfaction of its receivable 

is at least equal to the credit union’s recorded 

investment in the loan, e.g., due to charge-offs. 

‘‘Workout Loan’’ means a loan to a 

borrower in financial difficulty that has been 

formally restructured so as to be reasonably 

assured of repayment (of principal and 

interest) and of performance according to its 

restructured terms. A workout loan typically 

involves a re-aging, extension, deferral, 

renewal, or rewrite of a loan.17 For purposes 

of this policy statement, workouts do not 

include loans made to market rates and terms 

such as refinances, borrower retention 

actions, or new loans.18

‘‘Extension’’ means extending monthly 

payments on a closed-end loan and rolling 

back the maturity by the number of months 

extended. The account is shown current 

upon granting the extension. If extension fees 

are assessed, they must be collected at the 

time of the extension and not added to the 

balance of the loan. 

‘‘Deferral’’ means deferring a contractually 

due payment on a closed-end loan without 

affecting the other terms, including maturity, 

of the loan. The account is shown current 

upon granting the deferral. 

‘‘Renewal’’ means underwriting a matured, 

closed-end loan generally at its outstanding 

principal amount and on similar terms. 

‘‘Rewrite’’ means significantly changing the 

terms of an existing loan, including payment 

amounts, interest rates, amortization 

schedules, or its final maturity. 

[FR Doc. 2021–13906 Filed 6–29–21; 8:45 am] 

BILLING CODE 7535–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2020–0790; Project 

Identifier 2020–NM–077–AD; Amendment 

39–21604; AD 2021–12–17] 

RIN 2120–AA64 

Airworthiness Directives; ATR–GIE 

Avions de Transport Re ́gional 

Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule. 

SUMMARY: The FAA is adopting a new 

airworthiness directive (AD) for certain 

ATR–GIE Avions de Transport Re ́gional 

Model ATR42–300, –320, and –500 

airplanes; and all Model ATR72–101, 

–102, –201, –202, –211, –212, and 

–212A airplanes. This AD was 

prompted by reports of defective seat 

tracks. This AD requires a detailed 

visual inspection of each affected part 

for deficiencies (sealant blockage and 

out of tolerance ligaments), and 

depending on findings, accomplishment 

of applicable corrective actions, as 

specified in a European Union Aviation 

Safety Agency (EASA) AD, which is 

incorporated by reference. The FAA is 

issuing this AD to address the unsafe 

condition on these products. 

DATES: This AD is effective August 4, 

2021. 

The Director of the Federal Register 

approved the incorporation by reference 

of a certain publication listed in this AD 

as of August 4, 2021. 

ADDRESSES: For material incorporated 

by reference (IBR) in this AD, contact 

EASA, Konrad-Adenauer-Ufer 3, 50668 

Cologne, Germany; telephone +49 221 

8999 000; email ADs@easa.europa.eu; 

internet www.easa.europa.eu. You may 

find this IBR material on the EASA 

website at https://ad.easa.europa.eu. 

You may view this IBR material at the 

FAA, Airworthiness Products Section, 

Operational Safety Branch, 2200 South 

216th St., Des Moines, WA. For 

information on the availability of this 

material at the FAA, call 206–231–3195. 

It is also available in the AD docket on 

the internet at https://

www.regulations.gov by searching for 

and locating Docket No. FAA–2020– 

0790. 

Examining the AD Docket 

You may examine the AD docket on 

the internet at https://

www.regulations.gov by searching for 

and locating Docket No. FAA–2020– 

0790; or in person at Docket Operations 

between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

The AD docket contains this final rule, 

any comments received, and other 

information. The address for Docket 

Operations is U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE, 

Washington, DC 20590. 

FOR FURTHER INFORMATION CONTACT: 

Shahram Daneshmandi, Aerospace 

Engineer, Large Aircraft Section, 

International Validation Branch, FAA, 

2200 South 216th St., Des Moines, WA 

98198; phone and fax: 206–231–3220; 

email: shahram.daneshmandi@faa.gov. 

SUPPLEMENTARY INFORMATION: 

Background 

EASA, which is the Technical Agent 

for the Member States of the European 

Union, has issued EASA AD 2020– 

0097R1, dated May 28, 2020 (EASA AD 

2020–0097R1) (also referred to as the 

Mandatory Continuing Airworthiness 

Information, or the MCAI), to correct an 

unsafe condition for certain ATR–GIE 

Avions de Transport Re ́gional Model 

ATR42–300, –320, –400, and –500 

airplanes; and all Model ATR72–101, 

–102, –201, –202, –211, –212, and 

–212A airplanes. Model ATR42–400 

airplanes are not certificated by the FAA 

and are not included on the U.S. type 

certificate data sheet; this AD therefore 

does not include those airplanes in the 

applicability. 

The FAA issued a notice of proposed 

rulemaking (NPRM) to amend 14 CFR 

part 39 by adding an AD that would 

apply to certain ATR–GIE Avions de 

Transport Re ́gional Model ATR42–300, 

–320, and –500 airplanes; and all Model 

ATR72–101, –102, –201, –202, –211, 

–212, and –212A airplanes. The NPRM 

published in the Federal Register on 

September 9, 2020 (85 FR 55619). The 

NPRM was prompted by reports of 

defective seat tracks. The NPRM 

proposed to require a detailed visual 

inspection of each affected part for 

deficiencies (sealant blockage and out of 

tolerance ligaments), and depending on 

findings, accomplishment of applicable 

corrective actions, as specified in EASA 

AD 2020–0097R1. 

The FAA is issuing this AD to address 

a structural failure of the seat track 

attachment during an emergency 

landing, possibly resulting in injury to 

occupants, and affecting emergency 

evacuation. See the MCAI for additional 

background information. 

Comments 

The FAA gave the public the 

opportunity to participate in developing 

this final rule. The FAA received no 

comments on the NPRM or on the 

determination of the cost to the public. 

Conclusion 

The FAA reviewed the relevant data 

and determined that air safety and the 

public interest require adopting this 

final rule as proposed, except for minor 

editorial changes. The FAA has 

determined that these minor changes: 

• Are consistent with the intent that 

was proposed in the NPRM for 

addressing the unsafe condition; and 

• Do not add any additional burden 

upon the public than was already 

proposed in the NPRM. 

Related Service Information Under 1 

CFR Part 51 

EASA AD 2020–0097R1 specifies 

procedures for a detailed visual 

inspection of each affected seat track for 

deficiencies (sealant blockage and out of 


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