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NCUA Offers MFOEL Clarification

The National Credit Union Administration (NCUA) issued a Letter to Federal Credit Unions (12-FCU-02) on July 20 to provide guidance and best practices on multi-featured open-end lending (MFOEL) plans and Multi-Featured Lending (MFL) plans. This guidance supersedes any previous guidance from NCUA on this topic following changes by the Federal Reserve Board (FRB) to Regulation Z in 2009.

Background
The Credit Union National Association (CUNA) and CUNA Mutual Group in February had urged the Consumer Financial Protection Bureau (CFPB) and the NCUA to revisit the rules for MFOEL plans and to clarify the rules on these plans, noting that elements of the regulations are confusing some credit unions. The Federal Reserve Board issued changes to Regulation Z’s open-end credit rules in January 2009 and rulemaking authority for Regulation Z transferred from the Fed to the CFPB on July 21, 2011. The NCUA letter issued Friday supersedes and replaces NCUA’s Letter to Federal Credit Unions 10-FCU-02, which contained NCUA's previous guidance on this subject. It also includes an attachment to a Supervisory Letter NCUA released Friday. This document will provide credit unions with insight to what NCUA is sharing with their field examiners.

NCUA Letter Overview (12-FCU-02)
The NCUA guidance states that credit unions are prohibited from using open-end processes and disclosures when underwriting is required for a transaction.  “Credit unions using MFOEL plans are permitted to verify a person’s creditworthiness to ensure it has not deteriorated (and revise credit limits and terms accordingly), but they must not perform underwriting because a person has requested a particular advance that would be treated as open-end credit under the plan,” the letter says. For MFOEL plans, credit unions may only verify credit information on a periodic or ad hoc basis.

The NCUA guidance also addresses 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 an MFOEL plan,” the guidance states. 

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 Reg 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 scorings 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.
  • Credit unions should use closed-end lending practices and disclosures when it is appropriate to perform underwriting at the time of the advance request. and
  • 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.

CUNA Mutual Group Response
CUNA Mutual Group, through its LOANLINER Documents, continues to provide direct support to thousands of credit unions to create an effective balance amongst credit union safety and soundness, member convenience and compliance requirements.  LOANLINER has the products to support credit unions’ requirements for compliant and efficient lending programs.

Communications with credit unions have already started. CUNA published a News Now article first thing Monday morning following  distribution of the letter from NCUA. LOANLINER will be sending a Compliance Alert pertaining to the NCUA’s letter to credit unions July 23.  Additional communications will be generated to keep credit union lenders and policy makers well informed of not only the implications the NCUA letter will have on their lending processes but also to present options so they can continue to serve members.  Credit unions should stay tuned for continued updates.

CUNA and CUNA Mutual Group will continue to coordinate closely to address any additional regulatory concerns credit unions may have pertaining to the NCUA letter.

Credit unions that have questions on the NCUA letter and/or their LOANLINER documents should contact LOANLINER compliance and operations experts at 800.356.5012 or loanlinercompliance@cunamutual.com.

CUNA Mutual Group (CMG) sent the following e-mail to the Missouri Credit Union Association (MCUA) and other leagues on July 23. It covers the guidance NCUA issued on multi-featured, open-end lending (MFOEL) plans. There has been tremendous confusion among NCUA examiners and others regarding the application of Truth-in-Lending provisions to these plans. The guidance clarifies that underwriting is not permitted with a particular new advance under an open-end plan.  The agency also issued guidance for examiners, expressly noting that examiners should not discourage credit unions from providing MFOEL plans to their members.