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<p>Loan-to-share ratios are dropping. If your credit union is not yet engaged in risk based lending, you should consider it as a way to boost your loan portfolios. Risk-based lending can expand your loan portfolio while balancing any additional risk with increased revenue. It allows you to offer lower rates to attract better credit risks, and, it allows you to offer loans with higher rates to poorer credit risks who otherwise may have no alternative but a predatory lender. The NCUA warns credit unions to be mindful of the Equal Credit Opportunity Act when designing risk-based lending programs. There are Truth in Lending disclosure issues that you must consider as well. Truth in Lending requires you to disclose the Annual Percentage Rate (APR) that applies to your members’ loans. This isn’t a problem if you’re making closed-end loans. You simply disclose the applicable APR in the “Fed Box” disclosures. Open-end disclosures are different. When the interest rates under an open-end plan are the same for everyone, the initial disclosures are the same. With risk-based lending, however, the rates are not the same for everyone. One person might be eligible for a 6% new auto loan and another might be eligible for an 11% rate. Some lenders resolve this problem by disclosing the range of rates in their initial disclosures. For example, they disclose that the rates for new auto loans vary from 6% to 11% depending on a borrower’s credit worthiness. Does Truth in Lending allow this? Truth in Lending requires that initial open-end disclosures include “each periodic rate that may be used to compute the finance charge.and the corresponding annual percentage rate.” To disclose “each periodic rate that may be used” does not mean disclosing each rate that the credit union offers. It means disclosing each rate that actually applies to the borrower’s account. For example, if you have different rates for cash advances and purchases with your credit cards, both rates must be disclosed. Disclosing the range of rates offered won’t violate Truth in Lending, but it also doesn’t satisfy the requirement to disclose the periodic rate and APR that are actually applicable to the borrower. To disclose the APRs that are applicable to each member may mean you have to make some changes to the open-end forms you’ve been using. Some credit card lenders use credit card agreements that are attached to their credit applications. Risk-based lenders can’t use this type of form, because they don’t know at the time of application the rate for which the person will be eligible. You can’t give some open-end disclosures at the time of application and others later because Truth in Lending requires all initial disclosures to be made in an integrated document. An integrated document can consist of multiple pieces of paper, but all the pieces must be provided to the member at the same time, and they must appear to be related to one another. What should these lenders do? They should use a credit card agreement that is separate from the application. Rather than preprinting the APR in their credit card agreements, they should use an addendum to disclose the rate that is applicable to each member. This way, the same credit agreement can be used for all members – only the addendum will differ. It’s easier and cheaper to prepare different addenda for different rates than to stock multiple cardholder agreements. Credit unions using multi-featured open-end systems, such as the LOANLINERr open-end lending system, already use an addendum to the credit agreement to list the various subaccounts under the plan and their rates. For risk-based lending, credit unions should use a separate addendum for each tier of the risk-based lending program so that members will receive the rates that are applicable to them. In others words, there must be an addendum for members who have A credit, B credit, etc. This is because, with the LOANLINER open-end system, all the subaccounts are part of the plan when it is opened. Because they are part of the plan, you must disclose the periodic rates and corresponding APRs for all the subaccounts that are part of the plan. It is possible to design open-end plans differently. Rather than treating all the subaccounts or credit features as part of the plan from consummation, a plan could be designed to treat only the credit features for which the member has been approved as part of the plan. When a member wants additional credit, the credit feature for that advance can be added to the plan. With this type of open-end plan, only the rate for the initial credit feature must be included in the initial disclosures. This rate can be disclosed on the voucher or disbursement receipt. All transaction-specific disclosures will be on the voucher or disbursement receipt. If you provide the voucher or disbursement receipt to members at the same time as the credit agreement, you’ll satisfy the requirement that initial disclosures be provided in an integrated document. The addendum to the credit agreement can continue to list the various credit features that are available under the plan and the range of rates for each feature to let members know the types of credit that are available under the plan. When a member needs additional credit, the credit feature (or subaccount) for that advance can be added to the plan. To do this, you must comply with 226.9(b) of Regulation Z, which requires certain disclosures to be made when a credit feature is added to an open-end plan. These disclosures can be built into the voucher or disbursement receipt that you provide with subsequent advances, so no additional work is necessary to add a credit feature to a plan. Using an open-end plan under which only approved credit features are part of the plan would also alleviate a major burden for many open-end lenders – change in terms notices. Because a member’s plan consists only of the credit features for which the member has been approved, unless you change the APR on a member’s credit feature, a change-in-terms notice is not necessary. Because credit unions rarely change rates on existing loans, change-in-terms notices will become less frequent and much less burdensome. Risk-based lending is more complicated for open-end credit, but there are ways to make it easier. If it brings in more loans, it will be well worth the effort.</p>

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