As credit unions are well aware, Regulation Z's new open-end lending rules under the Truth-in-Lending Act take effect July 1, 2010. Regulation Z establishes (among other things) uniform methods for disclosing credit terms. There is a lot of confusion among credit unions regarding the rules' effect on multifeatured credit plans.
Under the old rules, credit unions were allowed to provide open-end disclosures to all subaccounts under their plans, regardless of whether it was a revolving line of credit or a closed-end subaccount, such as a vehicle loan underwritten by the credit union.
In 2007, the Federal Reserve Board began its periodic review of the open-end rules. Through that process, it learned how credit unions' multifeatured plans work. The board said it could understand why Regulation Z was interpreted to allow open-end disclosures on closed-end subaccounts. But it also stated that it never intended the rules to be applied that way and closed the loophole when issuing its final rule in January 2009. The board emphasized that the Truth in Lending Act and Regulation Z have distinctly different rules for open-end and closed-end credit. It ruled that under a multifeatured plan, open-end advances must receive open-end disclosures and closed-end advances must receive closed-end disclosures.
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To distinguish between open-end and closed-end subaccounts for disclosure purposes, the board looked at whether a credit union underwrites the advance. Open-end credit such as revolving lines of credit and credit cards must be "revolving and replenishing." If the extension of credit is not revolving and replenishing, it is considered closed-end under Regulation Z.
With revolving and replenishing accounts, creditors establish a credit limit up to which the consumer may take advances without having to requalify each time. Because this supply of credit can be virtually unending, creditors are allowed to verify credit information periodically to ensure that the member still qualifies for the terms of the account. If the member's creditworthiness deteriorates, the credit union can manage its risk by suspending the line, raising the current annual percentage rate or lowering the credit limit. This process is called verification.
Underwriting occurs when credit verification is conducted as a condition of granting a consumer's request for a specific advance under the plan. An example is when a member requests a $25,000 advance for a vehicle loan, and the credit union checks the member's credit before approving the request. In such a case, the subaccount is closed-end and the member must receive closed-end disclosures.
It is important to note that credit unions may continue to underwrite their revolving subaccounts under Regulation Z. When subaccounts continue to meet the revolving and replenishing criteria for open-end credit, the credit union can check the member's credit rating when first establishing the account and again when they raise the credit limit. The new rules are not concerned with these traditionally open-end revolving accounts.
Multifeatured plans are still allowed under Regulation Z. The Federal Reserve Board did not intend to change the underlying nature of the plans or change the way credit unions underwrite their loans. Rather, the change in the rules is disclosure-driven. The board simply states that closed-end disclosures must be given for closed-end subaccounts.
The board did reject what it termed a hybrid approach. This approach was a proposal received during the rulemaking process that combined open-end and closed-end disclosures in tabular format which could be provided seven days after the loan was closed. In rejecting this approach, the board said the open-end and closed-end rules cannot be combined in that way. Rather, open-end disclosures must be provided with open-end subaccounts and closed-end disclosures with closed-end accounts.
Regulation Z does not require closed-end disclosures to be signed by the member nor does the advance receipt containing the "Fed Box" need to be signed. It only requires that the disclosures be provided in a form the consumer can keep, either in writing or electronically. That means credit unions can retain their single-signature plans.
Credit unions can provide the closed-end Fed Box disclosures on the member's advance receipt. Regulation Z requires that closed-end disclosures be provided at or before consummation, which when the member becomes obligated on the advance and the funds are disbursed. As long as members receive the advance receipt with the Fed Box disclosures at or before receipt of the funds, the Regulation Z requirements are satisfied.
The new rules require credit unions to change their disclosures but do not require them to change their underwriting practices. As long as credit unions provide the closed-end disclosures at or before fund dispersal, they may continue to underwrite as they always have.
Catherine M. Klimek is counsel at Securian Financial Group Inc. She can be reached at 651-665-3285 or [email protected]
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