Multi-Featured Open-End Lending: The Past, Present and Future

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.

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