Open-End Lending Drop Blamed on Regs, Confusion
In 2010, there were an estimated 3,400 credit unions engaged in multi-featured open-end lending.
Today, that number has dropped significantly due to a change to regulation in 2010, which made it difficult for credit unions to verify sufficient information at the time of a loan request to manage the risk changes, said Bill Klewin, director of regulatory compliance at CUNA Mutual Group.
Befuddled by when a member’s credit information should be checked and which types of transactions are allowed under MFOEL plans, the NCUA issued further guidance in July in an attempt to clear up any misunderstandings.
“But it still left credit unions with a great deal of confusion on how much they can do and when,” Klewin said. “Credit unions were saying ‘what can I do?’ and ‘what can’t I do?’ and ‘at what times?’ We at CUNA Mutual and at CUNA spent a lot of time working with NCUA, the Fed and the CFPB to get them to understand that issues and to get some clarity.”
The regulator’s definition of MFOEL plans are those that utilize an umbrella loan agreement for a single account that can be accessed repeatedly via a number of sub-accounts established for different credit features. The plan as a whole, including all its sub-accounts, is designed to be treated as open-end credit.
Klewin said they’re essentially a credit union’s entire consumer loans not linked to a credit card or secured by a dwelling. Lines of credit, share drafts and signature loans would fall in the MFOEL category. Because credit cards and home equity lines of credit have different lending schemes and have a tendency to be a bit more complicated, they wouldn’t qualify, Klewin noted.
Some of the confusion credit unions have expressed about MFOELs may stem from the myriad of changes in agencies monitoring the plans and regulation amendments. In January 2009, the Federal Reserve Board issued changes to Regulation Z’s open-end credit rules. A final rule in 2010 that focused on implementing the CARD Act incorporated the MFOEL portions of the Fed’s January 2009 final rule.
The rules made significant changes to how credit unions and other financial institutions were required to support open-end credit. So much that the NCUA issued a letter to federal credit unions advising them to review their policies and procedures to ensure they were in compliance with changes to Regulation Z that became effective July 1, 2010. With the establishment of the Consumer Financial Protection Bureau, rulemaking authority for Regulation Z transferred to the new agency from the Fed on July 21, 2011.
One of the sources of perplexity for credit unions is when the underwriting is required to take place. Traditionally, consumers would apply for credit once when an account was opened. The changes to Regulation Z said the underwriting must take place only at the opening of an MFOEL plan.
Once an MFOEL plan is established, credit unions may verify a member’s continued creditworthiness “occasionally” on a limited, ad hoc basis, or “routinely” on a regular, periodic timetable to determine whether a borrower continues to meet the credit union’s credit standards by reviewing a subset of the information collected at the plan’s opening.
“It’s up to the credit union to decide when to check,” Klewin said. “Occasional means in rare or unusual situations, and it can’t be in the case of a request for an advance.”
In response to the Regulation Z amendments, some federal credit unions have utilized a blended approach that uses an umbrella loan agreement for a member’s open-end lines of credit and closed-end loans. However, the blended approach is not an MFOEL plan.
Klewin said it is critical for credit unions to understand how the blended approach is structured on the closed end. While the rule said that with closed-end loan transaction, members must be given disclosures before consummation of the loan, there may be some question on when a member becomes obligated.
CUNA Mutual said it will assist CUs in understanding the changes.