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Thriving in the Aftermath: Single-Signature Lending Plans after Revised Reg Z Catherine Klimek, Counsel Jackie Philpot, Manager, Loan Documentation Services.

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Presentation on theme: "Thriving in the Aftermath: Single-Signature Lending Plans after Revised Reg Z Catherine Klimek, Counsel Jackie Philpot, Manager, Loan Documentation Services."— Presentation transcript:

1 Thriving in the Aftermath: Single-Signature Lending Plans after Revised Reg Z Catherine Klimek, Counsel Jackie Philpot, Manager, Loan Documentation Services 1

2 advances for which underwriting is done must be treated as closed-end credit with closed-end disclosures provided to the consumer. - Federal Reserve Board 2

3 Todays Topics Background – how you are doing things today Whats Changed? – the new rules Verifying v. Underwriting – Key! Now What? Plans after July 1, 2010 – how they may be structured 3

4 How Are You Doing Things Today? Single-signature: Member signs once when plan is established Variety of closed-end subaccounts (e.g., vehicle, boat) and open-end subaccounts (personal LOC, overdraft LOC) Underwriting each subaccount (pulling credit, determining eligibility, rates, loan amounts, etc.) Giving open-end disclosures for all subaccounts, even if they are closed- end 4

5 Why Are You Doing It This Way? Under the old rules, a plan is considered to be open-end as long as the plan overall meets the definition of open-end credit –Reasonably contemplates repeat transactions –Finance Charges imposed periodically –Credit available replenishes as member repays outstanding balance Comment 5: more reasonable for a financial institution to provide a vehicle loan under open-end credit than for an auto dealer So, as long as the plan, overall, is replenishing and has repeated transactions, all subaccounts are considered open-end, and therefore open-end disclosures can be given 5

6 Whats Changed? Federal Reserve Board has looked at this and said: –It can see how credit unions could have interpreted the rules the way they have; BUT –It never intended the rule to be applied that way; –It is now closing this loophole SO 6

7 Whats Changed? Under the new rules, each subaccount must be evaluated separately Determine whether its open-end or closed-end Provide open-end disclosures for open-end subaccounts; AND closed-end disclosures for closed-end subaccounts 7

8 Closed-end Fed Box Disclosures Format and Content set by Reg Z, 226.17 and 226.18 Sample Fed Box (For illustrative purposes only; compliance of Fed Box disclosures depends on the particular loan being disclosed) 8

9 Verifying v. Underwriting How do we determine if a subaccount is open-end or closed-end? Verifying versus underwriting is KEY!! If you underwrite the advance, it is closed-end and must receive CE disclosures Can provide OE disclosures only if you are merely verifying creditworthiness 9

10 Verifying v. Underwriting Verifying: you are doing nothing more than: –Determining if credit standing has deteriorated since the time the account was established so as to warrant a refusal of the advance, a suspension of the line, or the increasing of an existing APR 10

11 Verifying v. Underwriting Verifying: –FRB has stated that verifying is similar to how you would handle a credit card account or truly revolving LOC –Strict interpretation; err on the side of disclosure –Example: $10,000 credit limit; member is free to take advances, pay down balance, take advances again, and so on without applying or being approved again. However, CU is free to occasionally check credit to make sure creditworthiness has not deteriorated; if so, can increase rate, lower credit limit, suspend line, or refuse an advance. –Open-end disclosures are okay 11

12 Verifying v. Underwriting Underwriting: –Credit verification is performed as a condition of granting an advance. –E.g., approving an advance. Also: Determining interest rate Determining loan amount, etc. 12

13 Verifying v. Underwriting The creditor may occasionally or routinely verify credit information such as the consumers 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 consumers 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 13

14 Verifying v. Underwriting Examples: –(a) Member calls and says he wants to buy a vehicle and needs a loan. You check his credit and determine that he qualifies for $25,000 at 4.50%. Must provide CE disclosures –(b) member calls and asks if he qualifies for $30,000 in order to buy a car. You check credit and determine that he only qualifies for $25,000, so you counteroffer with $25,000. Member says okay. Must provide CE disclosures. –(c) You determine on March 1 that member qualifies for $25,000 at 4.50% for a vehicle loan. On September 1, member calls and asks for a vehicle loan. You verify credit and member still qualifies; you provide a $25,000 loan at 4.50%. Must provide CE disclosures because (1) no line of credit established; and (2) member cant take more advances against the $25,000 as the loan is paid down – not revolving or replenishing. 14

15 Why Is There Such Confusion? Verifying does not have a practical application for closed-end loans; it simply does not apply Dont try to jam verifying concept into underwritten subaccounts (round hole, square peg) You already know the difference between underwriting and verifying; youve been doing it for years: –Verify for lines of credit –Underwrite all other subaccounts 15

16 So Now What? Continue using a multi-featured, single-signature plan Give open-end disclosures (new Tabular Disclosures) for revolving LOCs Give Fed Box closed-end disclosures on the Advance Receipt or Disbursement Receipt for closed-end subaccounts; otherwise comply with CE rules 16

17 Other Closed-end Rules CE Disclosures must be given prior to consummation –Consummation = when funds are disbursed Mail with or give with loan check Provide on home banking website and then proceeds check mailed; Mail to member, place funds in savings account, and place hold on proceeds for 3 days to ensure that member receives disclosures. (Note: place in savings account; checking account could run afoul of Reg CC Funds Availability) 17

18 Other Closed-end Rules Pre-approved Auto Drafts –Provide Estimated Fed Box initially –Provide Auto Draft w/ check & instructions –Provide Advance Receipt with final terms after draft is processed 18

19 Other Closed-end Rules Additional disclosures in some states, e.g., dont sign docs with blanks Calculations and mapping for Fed Box Optional Products: total fee for that subaccount (can also provide monthly fee as long at total fee is also disclosed) 19

20 Securians Consumer Lending Plan No longer calling it open-end credit plan Still single-signature Still contains credit agreement and security agreement Open-end Tabular Disclosures provided either at time plan is established, or at time LOC is requested Closed-end Fed Box on Advance Receipt – does NOT have to be signed Optional product Total Fee and Monthly Fee on Advance Receipt State disclosures on Consumer Lending Plan doc Eliminate Rates & Fees Addendum New Plan does not have to be signed for existing planholders 20

21 Securians Consumer Lending Plan NOT a hybrid approach: –The hybrid approach that the FRB rejected was a mix-and-match hodgepodge Tabular Disclosure that had some OE disclosures, some CE disclosures, and was given 7 days after advance (if requested remotely) –FRB said no – TILA and Reg Z have 2 distinct and separate sets of rules: 1 for OE; and 1 for CE –For each subaccount, must determine if its OE or CE; if OE, give OE disclosures; if CE, give CE disclosure. –Securian follows exactly what the FRB says to do 21

22 Affect on Your Forms For Securian clients, the Advance Receipt will be revised to provide the Fed Box. You will also be sent a Truth-in-Lending Statement along with cost info. We will be sending proofs over the next several week. These are the critical forms to begin using July 1 st. We will be revising any other impacted forms (for example, open-end plan will be changed to Consumer Lending Plan.) as well. For non-Securian clients wishing to order, we will make every effort to provide you with a compliant Advance Receipt and Truth-in-Lending Statement by July 1 st. 22

23 Conclusion You can still underwrite IF you provide CE Fed Box Disclosures on the Advance Receipt If you are not providing the CE disclosures, you can only use a credit report to refuse the advance, suspend the line, or increase an APR 23

24 Checklist Familiarize yourself with Reg Zs CE Rules How will you satisfy the timing requirements? Map and program the Fed Box calcs Train your staff on the new forms/disclosures Lend, lend, lend! 24

25 Thank you! 25

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