By Nathan Bowden, CUCE, BSACS
Director of Compliance and Regulatory Affairs
Any credit unions doing open-end lending will almost certainly know that underwriting is allowed only at the time of account opening and that the only credit-related scrutiny that can occur thereafter is occasional verification of the member’s continued creditworthiness. There has been a fair amount of confusion about what level of scrutiny can be involved in a verification and about when the verification can be done.
Recently, the NCUA issued additional guidance on this issue in the form of a letter to federal credit unions (Letter No: 12-FCU-02) which replaces an earlier letter on the same subject (10-FCU-02). The new letter includes, as an attachment, a supervisory letter that functions to explain the issues to examiners.
The NCUA’s letter can be found here: http://www.ncua.gov/Resources/
- The attachment to the letter can be found here: http://www.ncua.gov/Resources/Documents/LFCU2012-02Encl.pdf
Every credit union that does open-end lending should have its lending-compliance personnel review the letter as well as its attachment. (The attachment is, in many ways, clearer and easier to follow than the letter.) In addition, CUNA provided a very good summary of the NCUA guidance earlier this week on its compliance blog, and I have included a copy of that summary below.
I cannot really add much to CUNA’s analysis, but from my perspective, one of the most important points is this: under the new guidance, it appears that NCUA will allow the verification process to be quite extensive, but NCUA will allow verification to be done only “’occasionally’ on a limited, ad hoc basis, or ‘routinely’ on a regular, periodic timetable (e.g., every six months).”
The guidance is very clear that NCUA will not allow a verification process ever to be triggered by, or in the slightest bit associated with, any advance request that a member makes after an open-end account has been underwritten and opened.
Even before this new guidance was issued, most credit unions had come to understand that the verification process can never be triggered solely by a member’s request for a new advance, but many credit unions (as well as many vendors and consultants) thought that a request for a new advance could be one factor in determining whether verification was appropriate.
And there are many credit union verification policies out there—many of them utilizing a table or matrix—that specifically include some minor verification procedures that are triggered by advance requests that cross certain dollar thresholds or that are made after a certain period of time has passed. But the new guidance clearly and unequivocally rejects that approach. As NCUA states in the attached supervisory letter:
Credit unions using MFOEL plans are permitted to occasionally or routinely verify a member-borrower’s creditworthiness to ensure it has not deteriorated (and revise credit limits and terms accordingly), but they must not perform underwriting or credit verification because a member-borrower has requested a particular advance that would be treated as open-end credit under the plan.
Credit unions engaged in MFOEL must have policies and procedures that clearly differentiate the underwriting requirements for opening a MFOEL plan versus the verification requirements that may take place “occasionally or routinely.” Credit unions may verify credit information on a periodic or ad hoc basis, but such verification cannot be done in connection with, or triggered by, an individual advance request or by a certain type of advance request.
For example, examiners may encounter credit unions that utilize verification matrixes in their MFOEL policies to determine what subset of a member-borrower’s credit information to verify based on various “triggers,” such as an advance request made a number of years since the member’s last advance, or a request for an unsecured large dollar loan. Such matrixes are impermissible for a MFOEL policy because, under Regulation Z, no verification of credit information can be done in connection with, or triggered by, an individual advance request if that advance is treated as open-end credit.
Here is the summary of the NCUA letter that appeared earlier this week on CUNA’s compliance blog:
NCUA's Letter No. 12-FCU-02: Regarding Guidance on MFOEL PlansMonday, July 23, 2012 at 04:44 PM ET
Last Friday the National Credit Union Administration (NCUA) issued a Letter to Federal Credit Unions, No.12-FCU-02, to provide guidance on multi-featured open-end lending (MFOEL) and to provide best practices to credit unions on MFOEL plans and Multi-Featured Lending (MFL) plans. It also includes an attachment to a Supervisory Letter titled: Supervision Considerations for Multi-Featured Lending Programs. This letter (12-FCU-02) supersedes and replaces NCUA’s Letter to FCUs 10-FCU-02 issued in September 2010 which contained NCUA’s previous guidance on MFOELs.
Five months ago, CUNA and CUNA Mutual Group had requested the Consumer Financial Protection Bureau (CFPB) and the NCUA to provide further guidance and clarification concerning MFOEL plans.
The NCUA guidance states that a foundation of open-end lending is that consumers apply for credit only one time: at account opening. Credit unions must gather enough information about borrowers at the opening of a MFOEL plan to determine the borrower’s creditworthiness.
Once the MFOEL plan is established, credit unions may verify a member’s continued creditworthiness occasionally on a limited, ad hoc basis, or routinely on a regular periodic basis, such as every six months or every twelve months by reviewing a subset of the information collected at the plan’s opening. However, such information cannot be verified in connection with a member’s advance request.
Additionally, a credit union cannot use underwriting criteria such as a debt-to-income ratio, or a credit score after the opening of an MFOEL plan in considering whether to grant an advance under the plan, nor can a credit union review a credit report or ask a member to verify income in connection with an advance request.
Credit unions that previously confirmed the borrower’s employment status or income level at the time of an advance request will have to discontinue that practice.
The NCUA letter also discussed Multi-Featured lending (MFL), or blended lending plans that use an umbrella loan agreement for a member’s open-end lines of credit and closed-end loans.
The blended approach is not considered an MFOEL plan.
The NCUA letter suggests that federal credit unions consider the following best practices:
- Draft and approve policies and procedures that differentiate open-end lending from closed-end lending. This should include specific processes for opening MFOEL plans, performing “occasional or routine” verification, issuing advances within open-end policies, and establishing specific credit limits for each feature within the plan;
- Use legal counsel to review the credit union’s policies, procedures, and documents for compliance with Regulation Z;
- Ensure the credit union’s data processing provider can support the credit union’s policies and procedures for MFOEL. Data processing systems must be able to identify members with MFOEL plans and send periodic statements appropriately;
- Ensure staff receives necessary training, including training of staff beyond the lending department. For example, member service representatives and call center staff should be knowledgeable of MFOEL terms and processes;
- When MFOEL advances are secured by collateral, it is still appropriate for credit unions to verify the collateral value;
- Portfolio credit scoring or “soft pulls” are appropriate if done on a routine, periodic or ad hoc basis for the entire MFOEL portfolio, but are not permissible in conjunction with a particular member advance that will be treated as open-end credit;
- After opening MFOEL plans, credit reports should be used on a routine, periodic or ad hoc basis to verify continued creditworthiness – not to underwrite an individual advance. Verification should not be specifically triggered by, or tied to, an advance request. For example, using credit report information to complete a debt-to-income ratio computation is impermissible if triggered by an advance request. Such computations may only be done on a periodic or ad hoc basis as part of a credit union’s ‘occasional or routine” verification procedures.
- Credit unions should determine whether a particular advance is properly characterized as open-end or closed-end credit and provide the appropriate disclosures. Credit unions should use closed-end lending practices and disclosures when it is appropriate to perform underwriting at the time of the advance request. Examples of traditional MFOEL products where closed-end disclosures are generally more appropriate include vehicle-secured loans and large-balance unsecured loans.
- Credit unions may use a blended approach that uses a single master loan agreement for a borrower’s open-end and closed-end loans, provided that appropriate open-end or closed-end rules are followed and proper disclosures are given.
The one benefit that may result from this letter and the attached Supervisory Letter is that NCUA examiners across this country will hopefully develop a consistent voice regarding MFOEL plans rather than the inconsistent interpretations we have been hearing about for the past two years, such as you can’t do MFOEL loans- you have to switch to closed-end lending and you can’t do an automobile loan under a MFOEL plan.
More importantly, MFOEL Plans are still permitted by Reg. Z although credit unions will likely have to revise their MFOEL policies and procedures based on this most recent guidance.
For those of you who are not familiar with CUNA’s compliance blog, please know that it is a wonderful free resource for CUNA-affiliated credit unions, and you can view the blog online at the following location: http://www.cuna.org/compliance/member/index.php.
You will need to register on CUNA’s website, if you have not already done so, in order to view the blog, but once registered, you can view it as often as you would like, and there generally is something new on the blog every day.