Lending Compliance Takes a Detour

Slow down and watch for compliance hazards with multifeatured open-end lending plans.

November 1, 2012

NCUA’s Letter to Federal Credit Unions 12-FCU-02 placed a detour in the road for credit unions using multifeatured open-end lending (MFOEL) plans.

As many in the industry already know, the agency’s letter prohibits credit unions using open-end lending plans from engaging in any underwriting at the time of a member open-end advance. As a result, credit unions using these plans must now decide how they’ll incorporate a mix of open- and closed-end lending into their lending roadmap.

It’s still road construction season so there’s time for credit unions to assess their lending goals and members’ future needs, and pave the way to a compliant lending program.

NCUA’s letter allows credit unions to assess their lending infrastructure for the future. In most cases, credit unions will only need to redirect their existing lending programs by finding the right mix of open- and closed-end lending.

This path to lending follows a familiar road that is well-tested and has a clear regulatory road map. Additionally, the proliferation of electronic lending options, including electronic signature and smartphone loans, means these proven lending methods can be repurposed to provide a level of lending convenience that was once reserved for MFOEL plans.

Credit unions now can find the lending solution that is right for members.

Some credit unions may be detoured by a so called “blended approach” or multifeatured lending (MFL) program. Let’s be clear about what an MFL program is and what it isn’t. An MFL program is simply one method to offer both open- and closed-end loan transactions. It is not a method to combine these approaches in a way that circumvents regulations applicable to stand-alone open- or closed-end programs.

Alas, NCUA’s guidance on MFL programs led to immediate confusion regarding “single signature” MFL plans.

The agency recognized the confusion created by Letter to Credit Unions 12-FCU-02 and clarified its position on single signature plans in a letter released Aug. 15. Under a single signature plan, a member signs for both open-end advances and closed-end loan transactions one time—at plan opening.

When a member later receives a closed-end loan, he or she receives a Truth in Lending (TIL) disclosure for the closed-end loan prior to the disbursement of funds, but does not sign any document at the time of the closed-end loan transaction.

Although NCUA stated in the letter that the terms of such a single signature MFL approach complies with Regulation Z on its face, it warned that such a plan may not be compliant with Reg Z if it is not consistent with state law regarding consummation of loan transactions.

In a nutshell, here’s the issue NCUA is raising with consummation: TIL requires that a member receive the TIL disclosure for a closed-end loan prior to consummation of the loan. TIL defines consummation as the time a member becomes contractually obligated on a loan or other credit transaction.

Finally, state law governs when a member becomes obligated under a credit transaction. In general, state courts determine the time of consummation based on the facts and circumstances of each individual case. Thus, the definition of consummation can vary on a state-to-state level and on a court-to-court level within each state.

To date, the single signature approach has not been tested in any state court and is unsettled law. This uncertainty creates a compliance risk for credit unions considering such a plan. However, the single signature approach is only one among many potential roads for credit unions moving forward.

It’s road building season for credit unions. NCUA’s letters set out orange barrels in the construction zone regarding state law consummation concerns with single signature plans.

Credit unions are well advised to do what we’ve been trained to do in these situations: Slow down, watch for compliance hazards, and carefully plan your credit union’s lending infrastructure for the future.

BILL KLEWIN is the director of regulatory compliance for CUNA Mutual Group. Contact him at bill.klewin@cunamutual.com.