MADISON, Wis. – Credit unions have struggled in their attempts to comply with regulations regarding multi-featured open-end lending the last two years, and one compliance expert believes CUs will have to opt for closed-end lending in most cases.
Bill Klewin, director of regulatory compliance for CUNA Mutual Group, told Credit Union Journal many lending transactions that were treated as open-end lending in the past, including car loans and boat loans, or large unsecured transactions such as debt consolidation loans, probably will have to be treated as closed-end lending going forward. CUs have few options available for open-end transactions, he said, such as share draft overdraft or lines of credit, or perhaps CD-secured transactions where there is more than 100% collateral.
“Credit unions used to put almost all consumer loan transactions under the multi-featured open-end lending umbrella, with sub-accounts, because they reasonably contemplated doing business with the member over and over,” he explained. “A member would request an advance, and the credit union would verify the member’s continuing creditworthiness.”
The problem with this scenario began in 2010, when the Federal Reserve Board changed the rules, Klewin continued. Lenders now are allowed to review the creditworthiness of a borrower only on a routine basis. If a borrower requests an advance, the lender cannot pull that person’s file without making the transaction a closed-end loan.
On Aug. 15 NCUA released a second letter regarding MFOEL and multi-featured lending (MFL) plans. The letter, dated Aug. 10 and addressed to the senior counsel for Securian Financial Group/Minnesota Life Insurance Company, provides additional guidance to credit unions. Klewin noted the most important issue concerns disclosures being required before consummation of a closed-end credit transaction.
Multi-featured open-end lending still can be done, but Klewin warned there the severe limitations on verification of creditworthiness make it “impractical in almost every case.”