FORT LAUDERDALE, Fla. -
Regulation Z-also known as the Truth in Lending Act-defines open-end credit with the following criteria: creditor reasonably contemplates repeated transactions, creditor may impose a finance charge from time to time on an outstanding unpaid balance, and the amount of the credit may be extended to the consumer during the time of the plan is generally made available to the extent that any outstanding balance is paid.
Because open-end lending is primarily a credit union offering-and one CUs use to go up against competition from banks-these changes have become a hot topic for CUs, according to Tim Kovac of CUNA Mutual Group. Indeed, Kovac led a session on proposed changes to Reg Z at the recent NASCUS State Summit, and seminars on the subject put together by CUNA Mutual Group were sold out. The FRB's proposed changes would require each lending feature of a multi-featured open-end lending plan must be self-replenishing, and open-end lenders would not be able to underwrite specific loan transactions under an open-end lending plan.
"When you combine the effect of these two fundamental changes, multi-featured, open-end lending as currently used may no longer be a viable method of making loan advances to members," Kovac said. "If the proposed regulations go into effect, credit unions will be forced to modify their lending practices, thereby losing the convenience and lower cost their members currently enjoy.
"Credit unions will need to retrain staff and increase staffing to accommodate the changes," Kovac continued. "All this means greater expense to credit unions, which will erode credit unions' competitive position."
Open-end plans are currently used by CUs of all asset sizes, Kovac noted. "Open-end lending allows credit unions to make most consumer loans under one umbrella loan agreement," Kovac said. "About 3,500 credit unions use multi-featured open-end plans. More than 1,800 credit unions under $50 million in assets use the product. And about 50% of top 1,500 credit unions use it. Credit unions have engaged in this type of lending for 25 years."
The advantages of open-end lending for CU members are: quick access to funds, remote lending and less paperwork, Kovac said. The advantages for CUs are: matching service of competitors, repeat business, less paperwork and remote lending.
The proposal could adversely affect CUs' customer service reputation and disrupt the CU industry's primary method of meeting members' demand for loans, Kovac said. But CU leaders are responding in an effort to preserve the lending process.
Credit card disclosures will be effected by the changes, but home equity lines of credit will not, he said. "CUNA Mutual, CUNA, NAFCU and others are preparing responses to these regulations," Kovac said. Kovac stressed the importance of credit unions reviewed the proposed regulations and making their concerns known.
"Credit unions are recognized for their outstanding service, year in and year out," Kovac said. "We need to let the Federal Reserve Board know what a significant impact their proposals will have on that tradition. We're a hybrid and I don't really think they understand that. This is very challenging issue for us. The Federal Reserve Board feels very confident with what they are doing.
"Get involved," Kovac told attendees. "Take action. Or help us take action." Comments are due to the Federal Reserve Board by Oct. 12.
Kovac said that even if the regulations are implemented, it's unlikely they will take effect before 2009, and recommended those using multi-featured, open-end lending should continue to do so.
