By Ashley L. Sweeney, Attorney
Multi-featured open-end lending (MFOEL) is a practice used for nearly 35 years by over 3,500 credit unions.[1] However, recent developments and regulations might have credit unions nationwide ushering in a new (and possibly improved) type of lending.
Under MFOEL plans, credit unions have a single lending contract with a member which covers multiple lending products.[2] In the past, these plans have been used to deliver the majority of credit unions’ consumer loans, despite the fact that they tend to be costly.[3] However, in 2008, the Federal Reserve made changes to Regulation Z[4] which affected MFOEL.[5] These changes further defined open-end lending and forced credit unions to review their policies and procedures in order to continue using MFOEL as a primary consumer lending strategy.[6] Nevertheless, many of the changes to the regulation proved confusing for credit unions across the county.[7]
This past year, after the urging of the Credit Union National Association (CUNA) and CUNA Mutual Group, the Consumer Financial Protection Bureau (CFPB) and the National Credit Union Association (NCUA) revisited MFOEL and provided additional guidance on these plans.[8] This guidance was in the form of a letter to federal credit unions, issued in July 2012.[9]
The NCUA Letter to Federal Credit Unions, 12-FCU-02, provides an overview of the best practices credit unions can use to ensure proper underwriting and disclosure for all of the different types of loans they might issue to their members. It reinforces that a credit union may not conduct new underwriting for an individual request for a new advance in a MFOEL program.[10] However, the letter states that “[c]redit 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)”[11] provided this is reviewed only on a periodic or ad hoc basis and not triggered by new requests for advances.[12]
The letter also discusses the blended approach which some credit unions utilized following the often confusing changes to Regulation Z.[13] The blended approach is a multi-featured lending plan that “is not a MFOEL plan.”[14] Instead, it combines both open-end and closed-end credit.[15] The blended approach is also less costly than a traditional MFOEL plan because it allows credit reports to be performed on an ad hoc basis as opposed to a global credit update. It appears then that the blended approach contains the best of both worlds of lending, provided that appropriate disclosures are given to members.
Of course, credit unions can continue to use MFOEL plans by following the policies and procedures outlined by the CFPB and the NCUA. However, now credit unions can also consider lending using the more cost-efficient blended approach. Either way, as long as proper procedures are followed and disclosures are made, credit unions can continue to provide multi-featured lending in the best interest of their members.
Footnotes:
[1] Bill Klewin, Focus On the ‘Open’ In Open-end Lending, CUNA LENDING COUNCIL (July 8, 2009), http://www.cunalendingcouncil.org/news/2970.html.
[2] Id. Examples of common MFOEL products include share overdrafts, unsecured lines of credit, share-secured lines of credit, vehicles, and home equity lines of credit. NCUA Letter to Federal Credit Unions, 12-FCU-02 (n. 2), NATIONAL CREDIT UNION ADMINISTRATION (July 2012), available at http://www.ncua.gov/Resources/Pages/LFCU2012-02.aspx.
[3] Klewin, supra note 1. MFOEL can make the lending process more costly because the lender must do a portfolio-wide credit update as opposed to one update performed only for those members seeking an advance.
[4] Regulation Z previously regulated the rules of MFOEL, however, this authority is now vested in the Consumer Financial Protection Bureau (CFPB). Multi-featured Open-end Lending Guidance Revised, NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (July 23, 2012), http://www.nafcu.org/News/2012
_News/July/Multi-featured_open-end_lending_guidance_revised/.
[5] Klewin, supra note 1.
[6] Id.
[7] Credit Union Association of Rhode Island, NCUA Offers Guidance on Multi-Featured Open-End Loans, CUNA LENDING COUNCIL (August 6, 2012), http://www.cunalendingcouncil.org/news/4915.html.
[8] Id.
[9] NCUA Letter to Federal Credit Unions, supra note 2.
[10] Id.
[11] Id.
[12] Id. “If a credit union does verify credit history and other factors in response to a request, then the transaction must be treated as a closed-end loan and the credit union must follow closed-end disclosure rules.” Multi-featured Open-end Lending Guidance Revised, supra note 4.
[13] NCUA Letter to Federal Credit Unions, supra note 2.
[14] Id.
[15] Id.
Ashley Sweeney is an attorney of Consumer Collections located in the Pittsburgh office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 412.338.7147 and asweeney@weltman.com.
By Cheryl D. Cook, Attorney
If capital is the fuel that drives business development, then it should stand to reason that the more business lenders in the market, the better. According to the United States Small Business Administration, small businesses accounted for 65% (or 9.8 million) of the new jobs created between 1993 and 2009.
However, because credit unions are limited in their ability to extend business loans to a relatively small percentage of their total assets, credit unions occupy a smaller share of the business lending market. Absent an exception from the National Credit Union Administration (NCUA), credit unions are not permitted by law to have outstanding member business loans exceed 12.25% of their assets.
The Small Business Lending Enhancement Act (S. 2231) seeks to increase this limit to 27.5% of assets.[1] The bill includes controls, such as a requirement that, to exceed the 12.25% limit, credit unions would need to be well-capitalized and demonstrate five years of sound underwriting and servicing of business loans. In addition, the bill would maintain close NCUA control to monitor expansion of the member’s business lending portfolio to the 27.5% proposed in the legislation.
Banks, in general, have opposed increasing credit union business loans at higher percentages of their asset base, claiming that because credit unions enjoy nonprofit status that shields them from state and federal taxes, they would have an unfair business advantage.
In addition, there have been reports that smaller credit unions also oppose the proposed legislation because they believe that passage would expose them to increased liability if they have to share responsibility for failure of business loans made by larger credit unions chasing higher revenues at the expense of sound underwriting and risk management practices.
In April 2012, Dennis Moriarity, the treasurer-manager of Unity Credit Union, a local Michigan credit union, wrote a letter to the United States Senate and the Banking, Housing and Urban Affairs committee, which has now become public record, expressing his concern about the potential risk to credit unions that do not participate in business lending.
“Our concerns lie with the exposure that this enhanced authority would present to the thousands of credit unions that currently do not participate in business lending or are at ease operating within the current limits of the law,” Moriarity said. “The exposure is to our reserves and retained earnings which could eventually be confiscated to pay for the mistakes of lenders who are unfamiliar with the complexity of business lending or who might ignore risks in pursuit of revenues.”
However, those supporting the legislation have suggested that credit unions’ ability to offer these loan products to their members would provide growth opportunities, and that the banks’ claim of unfair tax advantages is just sour grapes.
According to Bill Cheney, President and CEO of Credit Union National Association (CUNA), in a published statement, “…raising the 12.25% cap to 27.5% would produce a conservatively-estimated first-year increase of $14 billion in loans and 157,000 jobs nationally.” Cheney further noted, “S. 2231 is about giving the credit unions with the most business lending experience the opportunity to continue to lend to their members, and continue to help in the economic recovery.”
Credit unions interested in increasing their volume of business loans should focus on their evaluation of business customers before making loans. Proper investigation and underwriting on the front end can save a great deal of aggravation on the back end in any loan transaction, and a track record of well-performing business loans may go a long way to support the increase on business lending limits should the legislature move forward on this law during the next year.
In any event, it does not appear that the issue will be resolved soon. While greater availability of capital would encourage business growth, the events of the last several years mean that any proposal to increase lenders’ risk will undergo strict scrutiny in an attempt to head off further bail-outs or other disasters. Input from credit unions on both sides of the debate will be necessary to provide legislators with the information they need to make further decisions on this topic.
[1] As of Monday, November 26, 2012, the legislation was discussed as a bill for the Senate floor that week, but remains in committee. It is unlikely to move further until 2013.
Cheryl Cook is an attorney in the Bankruptcy unit located in the Detroit office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 248.989.3089 and chcook@weltman.com.
By Keri P. Ebeck, Attorney
What is loss mitigation and how does it affect a credit union/lender as the mortgagee? Loss mitigation is a term used to describe loan workouts and negotiations between the homeowner and lender to prevent or rectify default and foreclosure. Typically, loss mitigation encompasses: loan modifications, short sales, forbearance agreements, deeds-in-lieu of foreclosure and any cash-for-keys options.
When a borrower is in default on their mortgage and/or in foreclosure, several states and jurisdictions at the state court level have court sanctioned loss mitigation programs. These programs allow the lender and homeowner to negotiate towards a loss mitigation workout to help the homeowner avoid further default and foreclosure before the lender can proceed with the foreclosure/sheriff’s sale process, but typically these processes create an uncertain amount of delay.
Within the last couple of years, this process has now moved to the federal bankruptcy courts. Unlike many state court programs, where a certain amount of delay is present, the bankruptcy court’s loss mitigation programs are tailored towards recognizing that the borrower/debtor is eligible for loss mitigation, having the lender review the borrower/debtor’s loan to determine within a short period of time whether or not a resolution of either one of the loss mitigation options is approved by the lender, or after thorough review, a borrower/debtor does not meet the requirements of the lenders’ loss mitigation programs. Either way, the bankruptcy court’s ultimate goal is to offer a program within the court process to facilitate a structured, meaningful negotiation but not to cause delay to the overall bankruptcy process.
How do the bankruptcy loss mitigation programs work and how does this affect the individual credit union lenders? Typically, most programs begin with the borrower/debtor filing a notice of request for loss mitigation, after which the bankruptcy court enters an order setting forth the loss mitigation terms and deadlines. These deadlines are: how long parties have to exchange financial information for the loss mitigation review; how long the lender has to review the debtor’s financial information; how long the parties have to negotiate a loss mitigation option; and overall, how long the loss mitigation program shall last in the bankruptcy. For example, in the Western District of Pennsylvania, the entire program from start to finish shall not proceed longer than 90 days from the date of the court’s order. This order also sets forth any status conferences or status reports that need to be filed with the court in an attempt to show the court that both parties are working in good faith.
When looking at the individual requirements of these programs, a credit union or any other lender may have several questions: (1) What financial information is exchanged between the parties? Any financial information that the lender deems relevant (within reason) to review a borrower/debtor for a loan workout. This could include: list of expenses, income, proof of income, tax returns, bank statements and a hardship explanation letter; (2) How is this information exchanged between the parties? Some loss mitigation programs are informal and are done through the normal course of dealing with the borrower’s/debtor’s attorney. Other more involved programs, such as the Western District of Pennsylvania, whose loss mitigation program is run through a loss mitigation portal online, allows both parties to register, access and upload/retrieve documents; (3) Is the lender required to participate in the loss mitigation process? The answer is yes, unless the lender successfully objects to the participation for a valid reason (i.e. loss mitigation review has already been done and/or offered to this borrower/debtor); (4) What happens to the bankruptcy process during this time? The bankruptcy process proceeds as normal and runs simultaneously with the loss mitigation process in order to avoid delay in payment to the creditors. Most, if not all of the loss mitigation programs do not allow motions for relief to be filed during the review process, but otherwise, the bankruptcy proceeds as normal; and (5) Can the bankruptcy court order the lender to offer a loss mitigation option? In short, the answer is no. Under Section 1322 (b)(2) of the Bankruptcy Code, it expressly prevents the court from altering the rights of secured mortgage lenders with claims on the debtor’s principal residence. The court’s purpose is to provide an environment where both parties can work in good faith towards a resolution. The court however, can order the parties to do just that, act in good faith throughout the process.
So the ultimate question is: What should the lender/credit union do if it receives a notice of loss mitigation in one of these jurisdictions? The best advice would be to contact WWR and allow us to walk you through the process and getting the documents needed for the loss mitigation review. Although the process may seem uncomplicated, it does require a strict adherence to the guidelines and deadlines set by the court.
As of today, very few bankruptcy courts have instituted loss mitigation programs such as those in New York, New Jersey, Rhode Island and just recently in the Western District of Pennsylvania. Some bankruptcy courts have an informal, less structured process such as Indiana. To date, there are no loss mitigation programs in Ohio, Michigan, Florida, or Illinois.
As more information and more bankruptcy loss mitigation programs become available, WWR will update the credit unions with this information through its bankruptcy blog wwrbankruptcy.com.
Keri Ebeck is an attorney practicing in the Bankruptcy unit of Weltman, Weinberg & Reis Co., LPA, located in the Pittsburgh office. She can be reached at 412.434.7959 and kebeck@weltman.com.
By David A. Wolfe, Attorney
Paper billing is a predictable expense and credit unions are understandably eager to go paperless for their member communication, however, many members cling to traditional payment methods. Online banking and bill pay initiatives require a significant investment, but as credit unions switch to electronic statements, they are experiencing increased traffic to their websites and immediate, hard cost reductions.
The E-SIGN Act, enacted in June 2000, provides a general rule for validity of electronic records and allows credit unions to send customers electronic mortgage statements where the member has affirmatively consented to receiving these statements in electronic form. The statute requires credit unions to provide members clear and conspicuous statements of their right to have the record made available on paper and the right to withdraw consent, including any conditions, consequences and fees in the event of such withdrawal; whether the consent applies only to the particular transaction that triggered the disclosure; describing the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and informing the consumer how they may request a paper copy of a record and whether any fee will be charged for that copy.
Prior to consenting to the use of an electronic record, under the E-SIGN Act, the credit union must provide the member with a statement of the hardware and software requirements for access to and retention of electronic records. Finally, if the member consents electronically or confirms their consent electronically, it must be in a manner that reasonably demonstrates the member can access information in the same electronic form that will be used to provide the information.
Pursuant to the Dodd-Frank legislation, the Consumer Financial Protection Bureau, (CFPB), has proposed a new rule to allow credit unions to send electronic mortgage statements if the member consents and the full E-SIGN Act consent process would not be required. Section 128(f)(2) of the Truth in Lending Act (TILA), provides that periodic statements “may be transmitted in writing or electronically,” and the CFPB’s proposal would allow credit unions to meet this requirement by sending the member an e-mail notification that the statement is available instead of e-mailing the actual statement. The credit union would only have to obtain affirmative consent by the member to receive their periodic mortgage statements and not full compliance with E-SIGN verification procedures.
The CFPB is currently considering public comments, and its final rule is due January 21, 2013.
David is an attorney in the Consumer Collections unit of Weltman, Weinberg & Reis Co., LPA, in the Michigan office. He can be reached at 248.362.6142 and dwolfe@weltman.com.
Filed under: Consumer Financial Protection Bureau
By Matthew D. Urban, Attorney
As many politicians and pundits are fond of saying, elections have consequences, and in the case of the Consumer Financial Protection Bureau (CFPB), this old adage certainly holds true. Although much of the rhetoric of the campaign did not specifically touch on the current and future role and impact of the CFPB, an election night victory by President Obama ensured that it would continue to have the necessary support of the executive branch over the next four years to become an entrenched part of the federal government. When you take into account the Senate remaining in the hands of the democrats, it is abundantly clear that the CFPB is here to stay.
While the CFPB has only been in operation since July 21, 2011, a report just issued on December 14, 2012 by the House Oversight and Government Reform Committee reflects on the overall impact the CFPB has had on financial institutions, including credit unions along with the overall consumer credit market since its inception.[1] Specifically, the report found that the CFPB has increased the cost of consumer credit by $17 billion and has depressed job creation by approximately 150,000 jobs. In addition to the impacts on the general economy, the regulations issued by the CFPB have created a trickle down effect by substantially increasing the regulatory burden on all financial institutions, including credit unions. Despite the CFPB only having supervisory authority over financial institutions with $10 billion or more in assets, all financial institutions are bound by the regulations it issues and as such, credit unions are left to navigate through complex regulations without having the benefit of an entire compliance department like many of the larger banks.
A specific area that the CFPB focused on in 2012 was the mortgage market. Specifically, the CFPB has spent substantial time and resources on proposed changes to the current requirements of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) to the tune of 1,099 pages. In fact, the CFPB felt it necessary to post a blog on its website explaining why it took so many pages to create a three page disclosure form.[2] Unfortunately, while the CFPB believes it is reasonable to take almost 1,110 pages to make these changes, the real world impact for credit unions is that they now must wade through all of the pages just so they can ensure they are in compliance with the new rules. Onerous requirements such as these may ultimately lead credit unions to re-examine whether or not they should even be in the mortgage business, which in turn will ultimately impact a consumer’s ability to secure a competitively priced mortgage from a wide variety of lenders.
Another example of CFPB interventionism surrounds its involvement in regulating and enforcing the Equal Credit Opportunity Act (ECOA). On April 18, 2012, the CFPB issued bulletin 2012-04, which in their own words stated that they were providing lenders with “fair notice on fair lending” and that they intended to vigorously enforce the fair lending principles outlined in Regulation B.[3] Along similar lines, the CFPB has spent substantial time and resources in the past year exploring alleged lending abuses being perpetrated against the elderly. More recently, they have begun looking into student loan lending practices.
While it may seem that the CFPB is doing its best to create an unmanageable regulatory environment for financial institutions, particularly credit unions, it is actually attempting to comply with one of its mandates by streamlining the regulations it inherited from the Federal Reserve. Specially, the Senate recently approved a House bill (H.R. 4367) which amended the Electronic Fund Transfer Act to eliminate the requirement that a fee disclosure be placed in a prominent and conspicuous location on or at an ATM. Provided the bill is signed into law by the president, the fee disclosure will only need to be made on the ATM screen and not physically on the machine. While this represents more of an isolated example of eliminating a regulation as opposed to creating a new one, the fact of the matter is that the requirement likely would still be in effect but for the work of the CFPB, thus giving credit unions one less compliance concern regarding their ATM’s.
As we enter 2013 however, one thing is clear and that is that the CFPB is here to stay. If credit unions are still of the belief that the CFPB does not impact them, they will soon discover that not to be the case. Whether your credit union has been monitoring the actions of the CFPB or not, now is the time to begin to develop a comprehensive strategy for navigating the ever-changing regulatory environment that exists.
[1] http://oversight.house.gov/wp-content/uploads/2012/12/Access-to-Credit-Report-12.14.12.pdf
[2] http://www.consumerfinance.gov/blog/explainer-why-did-it-take-1099-pages-to-propose-a-three-page-mortgage-disclosure/
[3] http://www.consumerfinance.gov/blog/fair-notice-on-fair-lending/
Matthew Urban is the managing attorney of the Credit Union Group of Weltman, Weinberg & Reis Co., LPA, in the Pittsburgh office. He can be reached at 412.338.7134 and murban@weltman.com.
Filed under: credit unions
By Anne M. Smith, Attorney
When asking for identification, institutions must be aware of an important federal statute that prohibits photocopying of a U.S. government ID. Often, in situations such as real estate closings, a lender will make a copy of an ID card for its records, an action which is acceptable with most forms of identification. The U.S. government, however, has a vested interest in protecting its personnel, and government security in general, and has made it a crime to photocopy a U.S. government ID.
Criminal elements and terrorist organizations consider U.S. government identification as a high value asset that can be used against the U.S. military. Possible counterfeiting or “cloning” of a U.S. government identification card, whether held by a military member, family member, or a Department of Defense employee, is the reason for prohibition of photocopying of such an ID under TITLE 18 U.S.C. § 701: Official badges, identification cards, other insignia, as set out in part below:
“Whoever manufactures, sells or possesses any badge, identification card or other insignia of the design prescribed by the head of any department or agency of the United States for use by any officer or employee thereof, or any colorable imitation thereof, or photographs, prints, or in any other manner makes or executes any engraving, photograph, print, or impression in the likeness of any such badge, identification card, or other insignia, or any colorable imitation thereof, except as authorized under regulations made pursuant to law, shall be fined under this title or imprisoned not more than six months, or both.”
The federal statute is clear about the prohibition, but few institutions are aware of the copying ban. Per the Department of Defense website at www.cac.mil, there are situations in which photocopying of U.S. government identification is permitted. Such copies are permitted to facilitate medical care processing, check cashing, voting, tax matters, compliance with appendix 501 of title 50, U.S.C. (also known as “The Servicemember’s Civil Relief Act”), or administering other military-related benefits to eligible beneficiaries.
When requesting ID for photocopying purposes, lenders should be mindful of this ban, and request other forms of identification if they are to be photocopied. Other options for identification include:
- State driver’s license or other photo ID
- Written statement of verification of military service from member’s chain of command
- Proof of Service letter confirming service dates
- Statement of Service from local personnel office confirming military status
Violation of this federal statute can result in up to six months imprisonment, and/or a fine in an unstated amount. The statute formerly stated a fine of $250, but that has since been revised in favor of more ambiguous terms. One final reminder: Both the institution and the card holder should ensure that the card holder’s social security number is redacted from any copies.
Anne Smith is an attorney of the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA, located in the Cincinnati office. She can be reached at 513.333.4012 and ansmith@weltman.com.
