If you work for a federal credit union that offers multi-featured open-end lending (MFOEL) plans and you’ve fallen behind on your compliance reading, you might want to peruse Letter to Federal Credit Unions 12-FCU-02 as soon as possible.
NCUA issued this letter in late July to provide guidance and best practices on MFOEL plans. It supersedes and replaces the agency’s Letter to Federal Credit Unions No.10-FCU-02, issued in September 2010, which contained NCUA’s previous guidance on MFOELs.
A foundation of open-end lending is that consumers apply for credit only at account opening, the updated letter reports. Therefore, underwriting must take place only at account opening.
After the plan has been established, credit unions may verify a borrower’s creditworthiness “occasionally or routinely” to ensure it has not declined. Credit unions can then revise credit limits and account terms accordingly.
When creditworthiness has declined, credit unions may increase the annual percentage rate (with proper notice), reduce the credit limit, or even terminate the account.
The issue of greatest importance to credit unions, however, is the prohibition of any form of verification at the time of an advance request.
“Changes to the official staff commentary,” the letter states, “essentially mean credit unions offering MFOEL plans may ‘occasionally or routinely’ verify credit information, but verification of credit information cannot be done ‘as a condition’ of granting a new advance under the plan.”
This statement references Comment 2-(a) (20)-5 (Reg Z Section 1026.2).
“In other words,” the letter continues, “the underwriting of individual advances is not allowed for an extension treated as open-end credit under an MFOEL plan.”
It’s clear, therefore, that no verification of any information—credit report, credit score, debt-to-income ratio—and no confirmation of information, such as the member’s current income or employment status, can be obtained at the time of an advance request.
The letter does provide for occasional verification on a limited ad-hoc basis or routine verification on a regular periodic schedule, such as every three, six, or 12 months.
Implications for HELOCs
The letter discusses the impact of Regulation Z’s Commentary Section 2-(a) (20)-5 on MFOEL plans, but fails to mention that Section 2-(a)(20)-5 of the commentary applies equally to all open-end credit.
That includes all open-end loans, including simple lines of credit, credit card accounts, and home equity lines of credit (HELOC).
Whether a member has an advance request for $100 on a simple line of credit or a request for $50,000 on a HELOC, credit unions may not verify any of the member’s credit information whatsoever in connection with the advance request.
The inability to verify any credit information at the time of a $100 advance request isn’t too troubling, but the same can’t be said for the $50,000 HELOC advance request.
It seems like a safety and soundness issue would be created by not verifying certain information, such as the member’s credit score or employment status, at the time of a large HELOC advance request.
But Reg Z’s commentary, as well as NCUA’s Letter to Federal Credit Unions, makes it clear that verification of credit information can’t be done as a condition of granting a particular advance, even if it’s a large HELOC advance request.
NEXT: Safety and soundness