MFOEL…. What does that mean for me?
Remote Financial Services Manager,
Credit Union Resources, Inc
For those who participate in open-end lending, 2009 was a year of many changes in the way open-lending was conducted. In January 2009, the Federal Reserve Board (FRB) made many modifications to Regulation Z which significantly affected open-end credit loan products and birthed MFOEL.
What does MFOEL stand for?
Multi Featured Open-End Lending. In an MFOEL, the borrower will sign an umbrella loan agreement for one account that can be used in correlation to sub-accounts for different credit types. This type of plan is established to manage open-end credit. When the credit union uses a blended approach of open-end and close-end loan types, this is called Multi-Featured Lending (MFL).
What has changed in Regulation Z?
Prior to January 2009 credit unions could perform underwriting procedures for open-end lending plans, including each loan advance, and were encouraged to do so. However, this has changed under the new ruling. Now credit unions are only permitted to perform underwriting procedures when the credit line is established and afterward “occasionally and routinely”. “Under Regulation Z, no verification of credit information can be done in connection with, or triggered by, an individual advance request if that advance is treated as open-end credit” NCUA.
How do I underwrite open-end plans?
When the open-end plan is established, the credit union should gather enough credit information to determine the creditworthiness of the member for that line of credit as well as all subsequent advances. The credit union should develop a policy that determines the type of information that should be gathered at the creation of the plan to establish the member’s creditworthiness. Examples would be credit scores and debit ratios. Since credit unions can no longer re-verify creditworthiness for each loan advance, the credit union should also establish in their policy objective underwriting procedures for the “occasional and routine” monitoring of credit worthiness. An Examiner will be closely monitoring these policies to determine if MFOEL or blended MFL Policies establish the credit worthiness criteria used at plan opening and to determine if the establishment of procedures and timeframes for the “occasional or routine” verification of credit worthiness has been documented and implemented. The credit union should also document which products will be offered under the plan.
What does “occasionally or routinely” mean?
Often, credit unions will use the phrase “occasionally and routinely” in their MFOEL plan to establish the timeframe of ongoing monitoring of creditworthiness; however, the credit union should determine an actual timeframe and occasions that best suit the size and complexity of their credit union. Routine verification means a set timeframe (quarterly, semi-annually, annually, etc.) that the credit union has established in policy to determine if the member continues to meet the credit union standard for the terms and limit of credit. “Occasional is a limited, ad hoc basis that is outside the regular ‘routine’ side timeframe” NCUA. Again, these cannot be triggered by an individual loan request. “If a routine or occasional verification occurs concurrently with an advance request, the credit union should be able to demonstrate that the verification was performed within the verification procedures documented in the MFOEL Policy” NCUA. If during the routine and occasional verification process it is determined that the member’s creditworthiness has deteriorated, the credit union can revise the credit limit and terms of that plan.
Can the credit union still offer open-end auto loans?
Yes; however, the underwriting process for collateralized loans would remain the same as the open-end plan for a personal line of credit. Advances of the auto loan cannot trigger underwriting procedures or verification regardless of the time gap between advances. Be that as it may, verification of collateral valuation can still be executed before extending additional credit.
Am I in compliance?
With the continued changes to the Open-End lending program, many credit unions might feel confused or worried that they are not in compliance with these changes. If you have additional questions or concerns, there are resources available through Cornerstone Credit Union League and Credit Union Resources which can help explain and walk you through this complex situation.
NCUA.org. (July 2012). NCUA Letter to Credit Union (12-FCU-02.) Appendix A: Supervisory Letter – Supervision Considerations for Multi-Featured Lending Programs