WASHINGTON (9/18/12)--CUNA Mutual Group Director of Regulatory Compliance Bill Klewin recently offered credit unions a look at their options as they evaluate whether a restricted multi-featured, open-end lending (MFOEL) plan still meets their needs.
Klewin, during a Credit Union National Association (CUNA) quarterly pressing compliance issues audio conference and a recent CompBlog
guest post, discussed the impact of the National Credit Union Administration's (NCUA's) recent guidance (Letter 12-FCU-02) on credit unions' MFOEL and multi-featured lending (MFL) plans. That guidance supersedes an NCUA letter issued in September 2010 and confirms that MFOEL is a permissible method to make consumer loans.
The new letter states that a foundation of open-end lending is that consumers apply for credit only at account opening so underwriting must take place only at account opening. However, the issue of greatest importance to credit unions is the prohibition of any form of verification at the time of an advance request.
The letter, on page 3, states "Changes to the Official staff commentary (July 2010) essentially mean credit unions offering MFOEL plans may 'occasionally or routinely' verify credit information, but verification of credit information cannot be done 'as a condition' of granting a new advance under the plan."
Klewin notes the practical impact for most credit unions is:
- If a credit union had already moved to closed-end lending for some types of transactions, such as car secured loans, it is likely this letter has no impact;
- A credit union wishing to continue to use an MFOEL plan would need to rely on periodic reviews of a member's creditworthiness, and not rely on any such review at the time of an advance request;
- A combination of open-end and closed-end programs is the most likely and best result. Open-end lending would be appropriate, for example, for lines of credit and subaccounts that require no verification of creditworthiness at the time of an advance, such as share or CD secured subaccounts. Closed-end processes and disclosures are appropriate for loan types like car or boat secured loans, or large unsecured transactions, like debt consolidation loans, where a credit union feels verification of creditworthiness is needed at the time of a loan request; and
- The convenience and familiarity of MFOEL for your staff and members is gone. Some of the convenience can be replaced through digital signatures, pre-approved draft programs, and other processes, but lending convenience for members has been lessened.
Klewin also offers "a few random observations" about the MFOEL guidance:
- These rules apply to all open-end lending, whether simple lines of credit, MFOEL, credit cards, or home equity lines of credit (HELOC). Will NCUA examiners be reviewing for compliance all these kinds of open-end programs? Do they understand the ramifications of the rules, especially for HELOC's, where large advance requests are common?
- There are unanswered questions. For example, what if a borrower with a $2,000 credit limit on a line of credit, requests a $5,000 advance and an increase of their credit limit at the same time? Common sense says you should be able to review that person's creditworthiness, even if it is only for the amount of the request over the original $2,000 credit limit. A strict reading of NCUA Letter 12-FCU-02 would say you may not do such a review as it is based on an advance request.
- There is no such thing as a "closed-end" line of credit. If a credit union says it has a line of credit, but it reviews credit at the time of an advance request, it has a "closed-end line of credit." What the credit union really has is a series of closed-end loans under the rule.
Also, credit unions that verify certain limited information at the time of an advance request such as a member's credit score or debt-to-income ratio or that confirm information at the time of an advance request such as the member's income and employment status will have to discontinue such practices if they want to continue making such loans as open-end loans.
For more on MFOEL, use the resource link to access CUNA's CompBlog
and look at posts on Sept. 12 and Sept. 13.