Focus on the 'Open' In Open-End Lending

Not counting my first $400 loan from UW Credit Union in Madison, Wis. (to buy my first color television set), I cut my teeth in credit unions working with something called multifeatured open-end lending. Under this plan, credit unions have a single lending contract with a member covering multiple lending products.

The practice—used for nearly 30 years—has grown as a method to make member loans. More than 3,500 credit unions use it to deliver the majority of credit unions’ consumer loans, according to CUNA Mutual Group, Madison, Wis.

At the end of last year, the Federal Reserve issued changes to Regulation Z, amending the commentary affecting multifeatured open-end lending. Here’s the new rule, provided in the same section—2(a)(20)-5—with changes in italic:

[A] creditor may occasionally or routinely verify credit information such as the consumer’s continued income and employment status or information for security purposes but, to meet the definition of open-end credit, such verification of credit information may not be done as a condition of granting a consumer’s request for a particular advance under the plan. In general, a credit line is self-replenishing if the consumer can take further advances as outstanding balances are repaid without being required to separately apply for those additional advances.

What does this mean?
The changes further define open-end lending. Thus, credit unions must focus on the open-endedness of their multifeatured open-end lending plans.

As a result, review your practices, policies, and procedures to determine if you want to continue to use multifeatured open-end lending as a primary consumer lending strategy. Credit unions will need to comply by July 1, 2010.

Key questions to ask:

• Do you gather underwriting information when a member requests a multifeatured open-end plan? If a credit union may verify information in only limited circumstances, it needs to gather as much information on the borrower as it can at the time a member applies for the plan. Plan-opening is the time to underwrite the plan. You can’t verify information later on if you don’t have the necessary information against which to verify it.
• Can your members generally use their multifeatured open-end plan features with little verification of continuing credit-worthiness? Some indications of this include having subaccounts with credit limits that don’t require greater verification with every advance request. An example would be a share draft overdraft subaccount. While a credit union routinely may verify a person’s credit-worthiness based on a set schedule of review, almost all advances under such a subaccount are made with little verification beyond verifying the borrower for almost all such advances.
• Do you routinely verify continuing credit-worthiness? Many credit unions routinely review their entire portfolio quarterly or at some other regular interval. Routine updates allow you to track changes in credit-worthiness at times other than when members request an advance.
• Do you distinguish between a closed-end application process and open-end requests for advances? Fed staff expressed concerns about applying for individual advances under a multifeatured open-end plan. Processes must distinguish between closed-end applications and requests for advances under a multifeatured open-end plan.
• Does your data processing system allow you to identify members who have multifeatured open-end plans with your credit union? Credit unions must know which members have these plans to know when to use an open-end process rather than a closed-end process.

There’s no safe harbor for determining whether an open-end lending plan will comply with the changes to the definition of open-end lending. In reviewing your lending plan, determine what features you’ll need to change to maintain compliance.

Watch for more about multifeatured open-end lending in my next column.

BILL KLEWIN is associate general counsel at CUNA Mutual Group, Madison, Wis. Contact him at 608-231-7009 or at  bill.klewin@cunamutual.com.