MADISON, Wis.-Credit unions will have to alter their multi-feature, open-end lending plans with a July 1 Regulation Z compliance deadline looming.
Interest in getting in line with the new rules is strong: a CUNA Mutual webinar last week on the issue drew more than 1,000 participants.
CUNA Mutual Associate General Counsel Bill Klewin said it is the Federal Reserve's goal to change the relationship between creditor and lender on such loan plans. Multi-featured, open-end loans, a product offered "almost exclusively" by credit unions, encompass repeated member transactions, a finance charge imposed from time to time on outstanding balances, and credit made available to extent outstanding balances have been repaid.
The plans also usually include multiple sub-accounts with features such as overdraft protection or small lines of unsecured credit and larger lines of secured credit. But under its new regulations, the Fed is seeking to create a cycle where an account is opened, repaid, a new amount is requested and generally granted without much hassle, though borrowers do not have an "absolute right" to new credit. "A creditor can reduce credit limit or refuse to extend new credit in a particular case due to changes in the creditor's financial condition or the consumer's creditworthiness," Klewin explained. "You have the ability to verify continued creditworthiness, but (the Fed) feels that verification that extends to underwriting goes too far."
Changes Beget More Changes
The changes to Reg Z will force credit unions to make some changes of their own, including modifications to processes, staff procedures and documents. With new restrictions on when and how deeply a financial institution can investigate creditworthiness before approving or disapproving a credit request, the initial account opening will be critical.
"When you open an account you are going to want to gather as much information about your member to decide if you want to open an account. This is your chance to underwrite," said Klewin "You're not going to be able to force people to apply for additional advances. You cannot require them to go through an underwriting process" when they request a new advance.
Still, while such multi-featured, open-end loans may be configured differently beginning July 1, Klewin believes the product remains a strong point of differentiation for credit unions. He encouraged CUs to gather as much information as possible on members who have such accounts before the deadline to minimize risks while remaining in compliance. Staff should also be re-trained to see multi-featured, open-end loans not as separate closed-end transactions but as a series of transactions under an existing plan.
"The key concept is that you may underwrite to open up a plan. Thereafter, you may verify ongoing creditworthiness in certain circumstances," he emphasized, noting that advances under such loan plans will now operate somewhat like home equity lines of credit in terms of credit examination and approval processes. "This is a concept with which you are already familiar, just not with open-end lending."