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Inside Washington (09/17/2012)

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  • WASHINGTON (9/18/12)--Bankers stressed the importance of communication between themselves and examiners during roundtables hosted by the Federal Deposit Insurance Corp., Martin Gruenberg, acting chairman of the agency, said Friday at American Banker's Regulatory Symposium. "It is no surprise that we heard from community bankers about supervision and regulation," Gruenberg said. "Community bankers said that communication between examiners and the banks is crucial. This is particularly true in the pre-exam planning process. Bankers expect that the materials they provide to facilitate this advance planning will enable examiners to be as efficient as possible once they are on site. We have also heard that the examiners' communication with management at the beginning of the exam should clearly lay out the focus and goals of the exam." Communication issues with examiners also are challenging credit unions. In an internal review requested by the U.S. Congress, the National Credit Union Administration's Office of the Inspector General found inconsistencies in how small credit union examination policies and procedures are implemented (News Now Sept. 12) …

Blumenauer urges MBL increase from House floor

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WASHINGTON (9/18/12)--In an address on the U.S. House floor that has both been posted online and entered into the Congressional Record, Rep. Earl Blumenauer (D-Ore.) urged his congressional colleagues to advocate for legislation (H.R. 1418) that would increase the cap on credit union member business lending (MBL).

"Maybe it's time to give small businesses a boost by giving commercial banks a little competition" in the financial arena, Blumenauer said and noted that "for millions of Americans…a little competition to the big banks comes from credit unions."

Blumenauer's House-floor push for support of H.R. 1418 came as a delegation of credit unions from the northwest and representatives from Northwest Credit Union Association (NWCUA) Hiked the Hill to support credit union issues, such as increased MBL authority.

In his floor statement, Blumenauer pointed out that most credit unions are small- to medium-size, "very local," and that they are not-for-profit, often with volunteers as their board members. Since credit unions are owned by their members, and not by stockholders, they don't pay dividends to stockholders or "multi-million dollar bonuses to CEOs," Blumenauer said.

Instead, credit unions use their resources to keep down costs and increase service to members, Blumenauer highlighted.

But, he reminded lawmakers, credit unions currently are limited to lending no more than 12.25% of their assets to their small businesses members.

"Now legislation has been proposed to raise that cap to a little more than a quarter of a credit union's assets and that would be ideal for small business lending.

"It wasn't the credit unions on Main Street that almost brought the economy to its knees; it was the Wall Street gamblers and, too often, cheaters in the financial sector.

"Maybe it's time that we give small businesses a boost by giving commercial banks a little competition," He concluded as he urged lawmakers to advocate for the Small Business Lending Enhancement Act.

The Senate version of the legislation is S. 2231. A Senate vote has been promised this year and CUNA has every expectation that vote will occur, CUNA Senior Vice President of Legislative Affairs Ryan Donovan said.

Compliance Moving forward with MFOEL rules

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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.