Allowing capitalization of interest is consumer-friendly option
Allowing credit unions to capitalize interest would provide a consumer-friendly option and will likely lead to credit unions using it to help struggling borrowers, CUNA wrote to the NCUA Tuesday. CUNA’s comments were filed in response to NCUA’s proposal to allow credit unions to capitalize interest, which they have been expressly forbidden to do since 2012.
“Under the existing regulation prohibiting capitalization of interest, there are essentially no good options for modifying a loan for a member facing financial distress… It is clear another, more consumer-friendly option is needed,” the letter reads. “Thus, we urge the NCUA to adopt the proposed rule permitting credit unions to capitalize in connection with loan workouts and modifications. This is especially critical as it may take many months for consumers to become financially healthy given the ongoing COVID-19 crisis.”
The proposal also contains six consumer protection-related elements that must be present if a credit union’s loan policy permits capitalization of unpaid interest, which CUNA supports.
“We agree with the NCUA that capitalization of interest is not an appropriate solution in all cases, and a credit union should consider and balance its best interests with that of the borrower,” the letter reads. “Further, we agree that modifications of loans that result in capitalization of unpaid interest are appropriate only when the borrower can repay the debt in accordance with the modification. Thus, we support establishing these six consumer protection guardrails.”
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