Beware the Fed’s Proposals Within Proposals

Fed proposal could have a negative impact on CU members.

December 27, 2010

I’ve written about compliance fatigue and the ability of credit union lending staff to learn about, understand, and react to new regulatory proposals promulgated by the Federal Reserve Board.

The Fed published a new set of proposals regarding reverse mortgages and the rules for the right of rescission. This last set of proposals completes the triumvirate of proposals dealing with mortgages.

It’s possible the Fed will publish final rules on all three proposals next year. Credit union staff have known about these proposals and some have started planning for the massive changes to their lending processes and documents they’ll require if published as currently written.

However, buried within this last proposal was an item unrelated to mortgage lending regulations.

This additional proposal requires credit unions that sell credit insurance or debt cancellation or suspension products to make certain disclosures to their members.

These disclosures require credit unions to disclose information in the form of a table about the products, including information about cost, benefits, and the fact that the borrower may not receive any benefits even if they pay for the coverages.

The credit union system has always believed passionately in looking out for their members’ best interests. This belief has been demonstrated by credit unions and their providers as strong proponents of fair, accurate, and appropriate disclosures.

These proposals as drafted, however, misstate the value and purpose of these products. They’ll likely discourage members from purchasing products that are suitable and appropriate for their individual needs, as well as depriving credit unions of income they can use to serve members better.

Credit unions wouldn’t offer these products to members if they felt they were inappropriate or not a good value for members.

What would be a fair, accurate, and appropriate disclosure? Disclosures should reflect the nature of the products, their costs, their benefits, and any limitations on coverage. The member should be referred to their insurance professional and not given information in a vacuum.

The Fed’s website must be fair and unbiased. As the proposed disclosures are currently written, they don’t give members the information they’ll need to make informed decisions.

They may confuse and bias their decision to buy the products. Such an outcome would not be fair, accurate, or appropriate.

What should credit union professionals do?

  • Learn more about the proposed disclosures (pdf);
  • Talk to CUNA, league, or CUNA Mutual Group staff to get a better understanding of the proposal and its potential impact on your members and your credit union; and
  • Tell other credit union professionals about the proposal.

Credit unions have been overwhelmed with regulatory changes. This proposal is buried within another massive proposed change to the lending regulatory regimen.

Credit unions have always protected the best interests of their members. This is a proposal that could have a negative impact on your members.

Take the time to understand the effect this proposal will have on your members and your credit union, and take advantage of your ability to influence the rules so your members receive fair, accurate, and appropriate disclosures.

BILL KLEWIN is associate general counsel at CUNA Mutual Group, Madison, Wis. Contact him at 608-231-7009.