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NCUA Offers Guidance on Multi-Featured Open-End Loans

The National Credit Union Administration (NCUA) recently issued guidance (Letter to Federal Credit Unions 12-FCU-02) on multi-featured open-end lending (MFOEL) and provided best practices for MFOEL plans used as single accounts with separate sub-accounts for different loan products.

The Credit Union National Association (CUNA) and CUNA Mutual Group, in February, had urged the Consumer Financial Protection Bureau (CFPB) and the NCUA to revisit the regulation of multi-featured open-end lending plans and to possibly provide additional guidance on these plans, noting that elements of current regulations are confusing some credit unions.

The Federal Reserve Board issued changes to Regulation Z's open-end credit rules in January 2009 and rulemaking authority for Regulation Z transferred from the Fed to the CFPB on July 21, 2011. The NCUA letter issued Friday, July 20, 2012, supersedes and replaces NCUA's Letter to Federal Credit Unions 10-FCU-02, which contained NCUA's previous guidance on this subject.

In preparing this letter, the NCUA consulted with the CFPB on the interpretation of Reg Z as it relates to MFOEL.

The NCUA guidance notes that credit unions are prohibited from using open-end disclosures when safety and soundness requires that underwriting be performed for a particular loan product at the time funds are advanced.

"Credit unions using MFOEL plans are permitted to verify a person's creditworthiness to ensure it has not deteriorated (and revise credit limits and terms accordingly), but they must not perform underwriting because a person has requested a particular advance that would be treated as open-end credit under the plan," the letter says.

For MFOEL plans, credit unions may only verify credit information on a periodic or ad hoc basis.

The NCUA guidance also addresses blended-approach credit plans that use an umbrella loan agreement for a member's open-end lines of credit and closed-end loans. "The blended approach is not an MFOEL plan," the guidance states.

The NCUA letter suggests that federal credit unions, in complying with the open-end lending rules, "consider" the following best practices:

Draft and approve policies and procedures that differentiate open-end lending from closed-end lending. This should include specific processes for opening MFOEL plans, performing "occasional or routine" verification, issuing advances within open-end policies, and establishing specific credit limits for each feature within the plan.

  • Use legal counsel as warranted to review the credit union's policies, procedures, and documents for compliance with Reg Z.
  • Ensure the credit union's data processing provider can support the credit union's policies and procedures for MFOEL. Data processing systems must be able to identify members with MFOEL plans and send periodic statements appropriately.
  • Ensure staff receives necessary training, including training of staff beyond the lending department. For example, member service representatives and call center staff should be knowledgeable with MFOEL terms and processes.
  • When MFOEL plans are secured by collateral such as a member's residence, it is still appropriate for credit unions to verify the collateral value with each advance.
  • Portfolio credit scorings are appropriate if done on a routine, periodic or ad hoc basis for the entire MFOEL portfolio, but are not permissible in conjunction with a particular member advance that will be treated as open-end credit.
  • After opening MFOEL plans, credit reports should be used on a routine, periodic or ad hoc basis to verify continued creditworthiness—not to underwrite an individual advance. Verification should not be specifically triggered by, or tied to, an advance request. For example, using credit report information to complete a debt-to-income ratio computation is impermissible if triggered by an advance request. Such computations may only be done on a periodic or ad hoc basis as part of a credit union's "occasional or routine" verification procedures.
  • Credit unions should determine whether a particular advance is properly characterized as open-end or closed-end credit and provide the appropriate disclosures. Credit unions should use closed-end lending practices and disclosures when it is appropriate to perform underwriting at the time of the advance request. Examples of traditional MFOEL products where closed-end disclosures are generally more appropriate include vehicle-secured loans and large-balance unsecured loans.
  • Credit unions may use a blended approach that uses a single master loan agreement for a borrower's open-end and closed-end loans, provided that appropriate disclosures are given (and appropriate open-end and closed-end rules are followed).

The NCUA also issued a supervisory letter to examiners that directs them not to discourage MFOEL or blended programs. It says that examiners should, instead, ensure that credit unions understand and comply with the regulatory requirements regarding multi-featured lending, as well as provide "for the safety and soundness of the credit union."

The complete Letter to FCUs and the guidance to examiners can be accessed through this link: Letter to FCUs 12-FCU-02.

Reprinted with permission from the Credit Union Association of Rhode Island (www.cuassociationri.org).


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