NCUA Issues Letter to FCUs on Reg Z Impact on Multi-Featured Open End Lending Programs

Oct. 12, 2010 — The National Credit Union Administration (NCUA) recently issued a letter to its federal credit unions, 10-FCU-02, discussing Federal Reserve Board (FRB) changes to Regulation Z and the effects of those changes on credit union Multi-Featured Open End Lending (MFOEL) programs. While the FRB has the authority to implement Regulation Z under the Truth in Lending Act, NCUA has enforcement authority for federal credit unions.

For state-chartered credit unions, Truth in Lending Regulation Z is enforced by the Federal Trade Commission (FTC). However, the issues discussed for federal credit unions in NCUA's letter would be similar for state-chartered credit unions.

MFOELs, like CUNA Mutual's LOANLINER program, are single accounts with separate sub-accounts for different loan products such as share overdrafts, unsecured lines of credit, share-secured lines of credit, vehicles, and home equity lines of credit.

This past February, the FRB published changes to Regulation Z that affect the management of open-end lending. As NCUA states in its letter:

A foundation of open-end lending is that consumers apply for credit only one time, at account opening. The changes to Regulation Z clarify that underwriting must take place only at the opening of a MFOEL plan. Creditors 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 an advance.

As a result, credit union must ensure that their open-end lending policies and procedures distinguish between underwriting at the inception of the open-end lending relationship and verification that may take place during the duration of the relationship: including when the member applies for an additional draw on the pre-approved line of credit.

In addition, credit unions must ensure that the proper (open-end lending) disclosures are given in conjunction with MFOELs. Examiners are seeing credit unions using closed-end lending disclosures for MFOEL programs. NCUA's guidance to FCUs also contains a list of best practices.

You can view the letter at this link on the NCUA's Web site.