Dear Ms. Klimek:
You have asked if a federal credit union (FCU) may offer a multi-featured lending (MFL) plan that utilizes one umbrella loan agreement for multiple subaccounts with open-end and closed-end credit features. Yes, a lending plan that combines both open-end and closed-end credit is not inconsistent with the requirements of Regulation Z provided the FCU gives appropriate disclosures specific to each transaction under the plan and complies with applicable state law. 12 C.F.R. part 1026.1 An FCU is permitted to perform underwriting for each closed-end transaction under an MFL plan if it provides proper closed-end disclosures in each instance. We note, however, that even if the terms of an MFL plan comply with Regulation Z on their face, the MFL plan may not comply with state law in a particular state. In that instance, the MFL plan would not be a practical or legal option for an FCU in that state. We discuss this issue more fully below.
We understand that Securian Financial Group offers an MFL plan developed to adapt to changes to Regulation Z’s open-end credit rules that became effective in 2010.2 75 Fed. Reg. 7658 (Feb. 22, 2010). Those changes affected an FCU’s use of another kind of lending plan known as a multi-featured open-end lending (MFOEL) plan. MFOEL plans have been a common tool used by FCUs for many years. Generally, MFOEL plans utilize an umbrella loan agreement for a single account that can be accessed repeatedly via a number of subaccounts established for different credit features.3 The plan as a whole, including all its subaccounts, is designed to be treated as open-end credit even though the plan has closed-end features. 12 C.F.R. §1026.2, Comment 2(a)(20)-5. Many credit unions continue to offer MFOEL plans, which are often marketed as a flexible, efficient, and convenient lending option for members.
The 2010 changes to Regulation Z still permit MFOEL plans. However, the amendments made clear that underwriting of individual advances is not allowed for an advance treated as open-end credit under a MFOEL plan. In other words, FCUs using a MFOEL plan may not underwrite particular advance requests, which have open-end and closed-end features, even where it may be appropriate to do so for safety and soundness reasons because repeat underwriting is inconsistent with open-end lending.
We understand your MFL plan was designed to provide FCUs with an alternative to MFOEL plans while still affording members a flexible and convenient lending option, but in a way that allows FCUs to underwrite individual, closed-end advance requests when appropriate. Your lending plan provides features that are somewhat similar to a MFOEL plan, but your plan is not an exclusively open-end plan. Because it includes both open-end and closed-end features, it is more accurately described as a blended or MFL plan.4
You have indicated that, under your MFL plan, the member-borrower has the convenience of signing an umbrella loan agreement only once, when the MFL plan is first established. In signing the umbrella agreement, the member is agreeing to the general provisions of the credit agreement and security agreement, as well as the loan terms agreed upon at the time of any future advance under the plan. The MFL plan consists of multiple subaccounts for various loan products. Some subaccounts are open-end or revolving credit that are replenishing, such as personal lines of credit and overdraft lines of credit. Other subaccounts are closed-end loans that have a single disbursement and do not replenish, such as vehicle loans. Once the MFL plan is established, members may request open-end or closed-end advances depending on their particular lending needs.
We understand that to obtain revolving, replenishing, open-end subaccounts, a member applies to establish an initial line of credit (LOC) under the MFL plan. If approved, the member receives open-end disclosures in tabular format in accordance with Regulation Z’s open-end credit rules. See 12 C.F.R. §§1026.5 and 1026.6. Once the LOC is established, the FCU does not underwrite any particular advances, but it may occasionally or routinely verify that the member’s credit standing has not deteriorated.5 If the member’s creditworthiness has deteriorated, the FCU can suspend the line, decrease the credit limit, increase the APR, or refuse any future advances. If, however, the FCU has verified the member’s credit standing has not deteriorated, the member is entitled to take the advance without being required to qualify for it anew. The advance is not independently underwritten.
We understand that to obtain a single-disbursement, nonreplenishing, closed-end subaccount, such as a vehicle loan, a member is required under the MFL plan to apply and be approved for the advance. Specific advance requests are fully underwritten and the member receives the closed-end disclosures in accordance with Regulation Z’s closed-end credit rules. See 12 C.F.R. §§1026.17 and 1026.18. The disclosure, typically referred to as the Fed Box, is given before the time the member becomes contractually obligated on the loan.6 The disclosure is made by providing the member with an “Advance Receipt” that documents the transaction and contains the Fed Box.
Based on the information you have provided, we believe your MFL approach is permissible under Regulation Z subject to proper implementation under and in compliance with state law. In its rulemaking amending Regulation Z, the FRB7 stated that “the statutory framework clearly provides for two distinct types of credit, open-end and closed-end, for which different types of disclosures are deemed to be appropriate.” 74 Fed. Reg. 5244, 5259 (Jan. 29, 2009). Creditors must provide open-end disclosures for open-end credit and closed-end disclosures for closed-end credit. An MFL plan that combines both open-end and closed-end credit is not inconsistent with Regulation Z, provided the FCU complies with the requirements under 12 C.F.R. part 1026, subpart B for open-end credit and 12 C.F.R. part 1026, subpart C, for each closed-end loan transaction under the MFL plan and complies with applicable state law. By providing closed-end disclosures for each closed-end advance made under an MFL plan, the FCU is permitted to perform underwriting in connection with those individual advances.
Please contact Staff Attorney Pamela Yu or me with any questions.