NCUA’s Rules for 40-Year Real Estate Loan Modifications

Maturity limitations for long-term residential mortgage loan modifications under the National Credit Union Administration’s (NCUA’s) lending rule for federal credit unions have received a lot of attention recently. 12 USC §1757(5)(A)(i) permits federal credit unions to make long-term mortgage loans, but 12 CFR §701.21(g) sets the limitations for real estate loans not to exceed 40 years. In order to keep from exceeding this limitation, a credit union must be able to answer the question of whether this limited lending time begins at origination or at modification.

What generally confuses this matter is the fact that the terms “loan modification” and “loan origination” are sometimes used interchangeably. The key to distinguishing between the two is to determine whether or not the modified loan creates a separate and distinct obligation. If it does, then the loan’s 40-year limitation starts anew at the point of modification. If not, the limitation continues running from origination and cannot exceed 40 years.

The “separate and distinct obligation test” depends on all the particular facts and circumstances surrounding the loan modification, but the NCUA’s Office of Examination and Insurance stated that as a general guideline, if a member can obtain funds from sources other than the credit union at or near the same interest rate, then the credit union’s “modification” is likely a new loan.

However, based on a plain reading of the statute and regulation, when a federal credit union is modifying an existing loan, it is not making—or originating, for the purposes of this rule—a new loan. Therefore, the NCUA’s opinion is that a loan modification that renegotiates an existing loan conforms to the 40-year maturity limitation as long as the loan was first originated within the 40-year limitation. This means that if a loan meets the 40-year limitation at the time it is made, it will comply with the limitation, even if it is later renegotiated for a new modified term that collectively, with the original term, exceeds 40 years.

For example, if a federal credit union made a loan in 2000 with a maturity in 2040, and in 2030 that loan was replaced—or modified—with a new 40-year obligation maturing in 2080, the new maturity date would still comply with the 40-year limitation because the loan complied with the 40-year long-term maturity limit at the time it was made and again at the time it was modified.

However, in the same scenario, if the original loan in 2000 had had a maturity in 2050, or if the original loan was modified with a new 50-year obligation in 2030 that matured in 2080, the new maturity date would not comply with the 40-year long-term maturity limit because the original loan and the modified loan each exceeded the limit. Both the origination and the modification must be within the 40-year limitation. Together they can exceed the 40 years, but individually they cannot.

This rule generally lightens the regulatory burden for federal credit unions and their members, and it enables federal credit unions to align with federal initiatives aimed at financial recovery for troubled homeowners. It is important to note, though, that even if all regulatory requirements are satisfied on a loan, all loans are still subject to safety and soundness review by examiners who may object to particular loan modifications on an individual basis.

More information is available in the NCUA’s letter to federal credit unions.

Interested in learning more?

The Northwest Credit Union Association (NWCUA) is hosting a 90-minute webinar on March 28 entitled Real Estate Loan Workouts, Foreclosures, Short Sales and Deficiency Judgments. The online training will arm participants with additional information about real estate loan modifications as part of an in-depth look at the alternatives to consider when dealing with troubled real estate loans, including a workout, deed in lieu, short sale, foreclosure, deficiency judgment and receivership. The webinar will also cover the risks associated with each alternative, outlining the proper steps to take and criteria to consider in each situation.

The session is designed for those involved in the real estate loan and collection process, such as loan officers, workout officers, loan operations personnel, collectors, attorneys, compliance officers and managers. Registration information is available online.


Questions about loan modifications? Contact the Compliance Hotline: 1.800.546.4465,
Questions about the upcoming webinar? Contact Training Programs Coordinator Yuri Jung: 206.340.4817,

Posted in Compliance News, Federal, Industry Insight.