However, on May 23, FRB staff published proposed rules that would change this lending process, one that credit unions and members have embraced for 25 years.

Beginning in December of 2004, the FRB announced its intent to conduct a review of Regulation Z in stages, focusing first on the rules for open-end (revolving) credit accounts that are not home-secured, chiefly general-purpose credit cards and retailer credit card plans. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Bankruptcy Act'') primarily amended the federal bankruptcy code, but also contained several provisions amending the TILA. The Bankruptcy Act's TILA amendments principally deal with open-end credit accounts and require new disclosures on periodic statements, on credit card applications and solicitations, and in advertisements. In other words, the vast majority of the FRB's focus is on credit cards.

The proposed regulations change two bedrock concepts of multi-featured open-end lending.

1. The FRB proposal will require that each lending feature (i.e., sub account) of a multi-featured open-end lending plan must be self-replenishing.

2. The FRB proposal will require that credit unions (and any open-end lenders) will not be able to underwrite specific loan transactions under an open-end lending plan.

When you combine the effect of these two fundamental changes to multi-featured open-end lending, essentially, multi-featured open-end as currently used may no longer be a viable method of making loan advances to members.

Here's why: Suppose a credit union makes a $20,000 advance secured by a new car. Under current rules, if that member, in six months time, requests another advance, the credit union will be able to look at the member's creditworthiness to determine if they wish to make another advance. Assuming no significant changes in creditworthiness, the member should be able to borrow up to what he or she had paid back of the new car secured advance. This ability to underwrite gives the credit union the peace of mind that it is not putting the credit union in financial peril by making advances without adequate underwriting.

Under the proposed rules, the credit union would be required to advance money under the new car feature up to the $20,000 original amount, without the ability to do any underwriting at the time the member made the request for the subsequent advance. No credit union would be willing to make an advance like this without the ability to check on credit worthiness, especially on a piece of property that is depreciating in value. The effect of this is that multi-featured open-end lending may no longer be a viable approach for most credit unions. They will need to go back to closed-end lending.

1. Credit unions are known for the good deal they provide their members. This good deal is not only through great rates but also the convenience and service to meet their members' lending needs. If the proposed regulations go into effect, most credit unions will be forced to change to closed-end lending for many of their consumer loans. This means members will need to sign documents with every closed-end loan they obtain. Credit unions, and more importantly, members, will lose the convenience and lower cost they currently enjoy with multi-featured open-end lending.

2. Credit unions will need to retrain staff, change their document sets and data processing capabilities, and increase staffing to accommodate the changes. All this means greater expense to credit unions, which will have to be passed on to the members in the form of higher loan rates and perhaps less service.

3. The lending landscape is extremely competitive. Credit unions have responded by using multi-featured open-end lending to compete. If the FRB's proposal becomes effective, that competitive position will be eroded. Members will suffer through the lack of lending alternatives.

The most important thing for credit unions to do, whether they use multi-featured open-end lending or not, is to keep serving their members. These are proposed regulations at this point. Even if the regulations are put into effect, it's unlikely they will take effect until at least 2009. If you use multi-featured open-end lending, keep doing so.

CUNA Mutual, CUNA, NAFCU, and others are preparing responses to these proposed regulations. Review the proposed regulations and comment to these organizations on behalf of your credit union expressing your issues and concerns with the proposed regulations.