Thriving in the Aftermath: Single-Signature Lending Plans after Revised Reg ZCatherine Klimek, CounselJackie Philpot, Manager, Loan Documentation Services

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“ advances for which underwriting is done must be treated as closed-end credit with closed-end disclosures provided to the consumer.”

- Federal Reserve Board

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Today’s Topics

• Background – how you are doing things today

• What’s Changed? – the new rules

• Verifying v. Underwriting – Key!

• Now What? Plans after July 1, 2010 – how they may be structured

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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”

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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

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What’s 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

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What’s Changed?

• Under the new rules, each subaccount must be evaluated separately

• Determine whether it’s “open-end” or “closed-end”

• Provide open-end disclosures for open-end subaccounts; AND closed-end

disclosures for closed-end subaccounts

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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)

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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

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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

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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

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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.

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Verifying v. Underwriting

• The 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

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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 can’t take more advances

against the $25,000 as the loan is paid down – not revolving or

replenishing.14

Why Is There Such Confusion?

• Verifying does not have a practical application for closed-end loans; it

simply does not apply

• Don’t try to jam “verifying” concept into underwritten subaccounts (round

hole, square peg)

• You already know the difference between underwriting and verifying; you’ve

been doing it for years:

– Verify for lines of credit

– Underwrite all other subaccounts

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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

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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)

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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

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Other Closed-end Rules

• Additional disclosures in some states, e.g., “don’t 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)

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Securian’s 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

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Securian’s 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 it’s OE or CE; if OE, give OE

disclosures; if CE, give CE disclosure.

– Securian follows exactly what the FRB says to do

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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 1st. 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 1st.

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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

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Checklist

• Familiarize yourself with Reg Z’s 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!

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Thank you!

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