MADISON, Wis.-NCUA has issued a Letter to Credit Unions regarding multi-featured open-end lending (MFOEL) and blended lending, and one person is predicting that the number of credit unions using open-end lending will continue to decline as a result.
NCUA's Letter, dated July 20, serves to clarify regulations on MFOEL, which were originally issued in September 2010 by the Federal Reserve Board (which later transferred that authority to the Consumer Financial Protection Bureau). Among other things, the guidance provides further details regarding limitations on the amount of information a credit union can require at the time of an advance request, such as new credit score verification, new applications or other underwriting.
NCUA's full Letter is available at http://www.ncua.gov/Resources/Pages/LFCU2012-02.aspx.
Bill Klewin, director of regulatory compliance at CUNA Mutual Group, noted that in 2010, CUNA Mutual estimated that approximately half of the CUs in the United States relied on open-end lending. "Over the last couple of years, because of the original letter NCUA sent out on this particular issue, the number of credit unions using this approach has dropped from 3,400 to maybe 1,200-1,500 or even less."
Klewin emphasized that he does not believe the agency is trying to phase out MFOEL, but rather to provide clarity and hard and fast rules for those CUs that do use it.
"The restrictions placed on open-end lending back in 2010 led us to believe that we were going to see a drop off in the number of credit unions that did this or did open-end lending exclusively for their consumer loans," said Klewin. "I think based on the restrictions on being able to do underwriting verification at the time of an advance, we're going to see a substantial or similar dropoff from where we are now. What you'll see is an equilibrium of 250-300 credit unions that will continue to be able to use open-end lending as their means of consumer transactions; the remainder of credit unions will move to a combination of open-end and closed-end lending programs."
Larger CUs Primary Users
Larger credit unions will continue to be the primary users of open-end lending, predicted Klewin, who added that those CUs "are going to have to review their programs and make decisions about what steps they want to take. If they go to closed-end lending, no doubt it's less convenient to the member, because the member has to go into the credit union and sign docs, and it may be more expensive from a staff standpoint because they have to have appointments for closings and things."
While it may be less convenient, Klewin said that the change could spur credit unions to look more closely at electronic transactions, which would allow members to sign disclosures at car dealerships or in their own homes without requiring a trip to the branch. "At some point, I think this will continue us down the road of moving much more toward electronic kinds of disclosures as well," he said. "All this does is speed that up; we're already seeing it right now."
While many CUs will not be impacted by this, said Klewin, those that are exclusively using MFOEL should examine the issues that are most important to them strategically, whether it be member convenience, risk management or another factor. In some cases, he said, CUs may need to switch to closed-end or blended lending, while other institutions will be able to continue offering open-end lending, but with a different risk profile.
"Most credit unions need to keep in mind that they're going to go through an examination cycle, so they're going to want to move with some degree of diligence to be ready when the examiners come in to look at their program, whether they do open-end lending or closed-end lending. ... It's not like there's been a new set of regs passed. The regulations have been in place since 2010; it's more of 'When we come in and examine you, how we're going to view what compliance means in that particular case.'"