For more than 25 years, credit unions have used multi-featured,open-end lending as their preferred method to make non-real estate,secured consumer loans. Approximately half of all credit unions usethis lending approach, and about 60% of credit unions with assetsof more than $100 million use multi-featured, open-end lending astheir primary method of meeting members' demands for loans.

However, recently proposed changes to Regulation Z--theimplementing regulation for the Federal Truth in Lending Act (TILA)governing consumer credit disclosures--by Federal Reserve Boardstaff would put credit unions' use of open-end lending injeopardy.

As a reminder, multi-featured open-end lending works like this:A member has one account with the credit union. The member is ableto access a number of different features of the overall plan inmany ways, including over the phone, the Internet, or by cominginto the branch. Some of the features in such an account will beused frequently, such as a share draft overdraft feature. Somefeatures will be used less frequently, such as those features thathave collateral pledged as security for the loan, such as a newcar. Credit unions are allowed to underwrite every advance a membermakes to ensure the member still is credit worthy. As long as theplan as a whole is self-replenishing, in other words, as long asmember can borrow money, repay it, and borrow again under the planas a whole, the regulations currently provide that such a plan is asingle, multi-featured open-end plan.

Credit unions use multi-featured open-end lending as a processthat allows them and their members to establish long-term borrowingrelationships. This enables credit unions to provide loans to theirmembers how and where the member wants to borrow money from theircredit union. This ability to provide the convenience members cravediffers from closed-end lending, which is characterized bydisclosures and processes that require the lender and borrower toclose loans at the branch, losing the convenience members want andneed.

However, on May 23, FRB staff published proposed rules thatwould change this lending process, one that credit unions andmembers have embraced for 25 years.

Beginning in December of 2004, the FRB announced its intent toconduct a review of Regulation Z in stages, focusing first on therules for open-end (revolving) credit accounts that are nothome-secured, chiefly general-purpose credit cards and retailercredit card plans. The Bankruptcy Abuse Prevention and ConsumerProtection Act of 2005 (the "Bankruptcy Act'') primarily amendedthe federal bankruptcy code, but also contained several provisionsamending the TILA. The Bankruptcy Act's TILA amendments principallydeal with open-end credit accounts and require new disclosures onperiodic statements, on credit card applications and solicitations,and in advertisements. In other words, the vast majority of theFRB's focus is on credit cards.

The proposed regulations change two bedrock concepts ofmulti-featured open-end lending.

1. The FRB proposal will require that each lending feature(i.e., sub account) of a multi-featured open-end lending plan mustbe self-replenishing.

2. The FRB proposal will require that credit unions (and anyopen-end lenders) will not be able to underwrite specific loantransactions under an open-end lending plan.

When you combine the effect of these two fundamental changes tomulti-featured open-end lending, essentially, multi-featuredopen-end as currently used may no longer be a viable method ofmaking loan advances to members.

Here's why: Suppose a credit union makes a $20,000 advancesecured by a new car. Under current rules, if that member, in sixmonths time, requests another advance, the credit union will beable to look at the member's creditworthiness to determine if theywish to make another advance. Assuming no significant changes increditworthiness, the member should be able to borrow up to what heor she had paid back of the new car secured advance. This abilityto underwrite gives the credit union the peace of mind that it isnot putting the credit union in financial peril by making advanceswithout adequate underwriting.

Under the proposed rules, the credit union would be required toadvance money under the new car feature up to the $20,000 originalamount, without the ability to do any underwriting at the time themember made the request for the subsequent advance. No credit unionwould be willing to make an advance like this without the abilityto check on credit worthiness, especially on a piece of propertythat is depreciating in value. The effect of this is thatmulti-featured open-end lending may no longer be a viable approachfor most credit unions. They will need to go back to closed-endlending.

1. Credit unions are known for the good deal they provide theirmembers. This good deal is not only through great rates but alsothe convenience and service to meet their members' lending needs.If the proposed regulations go into effect, most credit unions willbe forced to change to closed-end lending for many of theirconsumer loans. This means members will need to sign documents withevery closed-end loan they obtain. Credit unions, and moreimportantly, members, will lose the convenience and lower cost theycurrently enjoy with multi-featured open-end lending.

2. Credit unions will need to retrain staff, change theirdocument sets and data processing capabilities, and increasestaffing to accommodate the changes. All this means greater expenseto credit unions, which will have to be passed on to the members inthe form of higher loan rates and perhaps less service.

3. The lending landscape is extremely competitive. Credit unionshave responded by using multi-featured open-end lending to compete.If the FRB's proposal becomes effective, that competitive positionwill be eroded. Members will suffer through the lack of lendingalternatives.

The most important thing for credit unions to do, whether theyuse multi-featured open-end lending or not, is to keep servingtheir members. These are proposed regulations at this point. Evenif the regulations are put into effect, it's unlikely they willtake effect until at least 2009. If you use multi-featured open-endlending, keep doing so.

CUNA Mutual, CUNA, NAFCU, and others are preparing responses tothese proposed regulations. Review the proposed regulations andcomment to these organizations on behalf of your credit unionexpressing your issues and concerns with the proposedregulations.