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:
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 email@example.com.