Regulation Z’s Role in Credit Unions’ Day-to-Day Business

If you could trace a straight line for consumer protection history, it would start with Regulation Z. Issued in 1968 after consumer credit experienced a massive increase following World War II, the new law was put in place as an effort to protect consumers from predatory lending practices. This is one reason credit unions should view Regulation Z in a positive light. Of course, this may seem difficult when measured against compliance challenges endemic to the regulation itself. With that said, let’s take a closer look and discuss common Regulation Z scenarios and how to handle them best. Here are a few brief scenarios that explain what the regulation means for credit unions today.

Preferential Rates

The most recent final ruling (in April 2011) allows for preferential loan rates for credit union employees. Of course, this is conditional. The employee must remain employed at the credit union in order to receive the preferential rate. Regulation Z states the account opening agreement must disclose the rate. In addition, it may also include the preferential rate. However, keep in mind that if the disclosure refers to a preferential rate, conditions and requirements for maintaining the rate must also be disclosed.

Safe Harbor Qualified Mortgages

Don’t forget about points and fees as they relate to permanent construction loans for qualified safe harbor mortgages. Regulation Z offers guidance on how points and fees are calculated and then allocated. Essentially, there are two options. Credit unions may treat a construction phase and a permanent phase as a single transaction. The other option is of course to treat them as two separate transactions.

Regardless of the option chosen, credit unions must calculate points and fees according to section 1026.3 (b)(1) of Regulation Z. Calculation of fees is not difficult. The fly in the ointment has to do with allocation. It may seem as if the preamble and staff commentary on specific sections of Regulation Z are somewhat vague. However, if you refer to Appendix D, you will find specific guidance on how to make calculations and allocations for mortgage loans when they are treated as either separate transactions or a single transaction. Therefore, we can interpret the vague language as a means for credit unions to make risk-based decisions when it comes to point allocation and fees for safe harbor qualified mortgages.

So while it may be cumbersome at times to deal with TILA changes in regard to forms and disclosures, the heart of Regulation Z points to consumer protection. That’s a cause any credit union can support.

Payment Posting

This specifically applies to closed-end lending, and excludes home equity lines of credit. Essentially, payments must be credited the date they are received. However, if you receive a payment and do not enter it until after the due date, it’s not considered a violation as long as no interest, penalties or late charges are assessed to the consumer.

In addition, the Official Staff Commentary allows loan servicers to establish what they call reasonable requirements in writing for consumer payments. These include things like requiring payment coupons or account numbers to accompany each payment, establishing set cut-off hours for receipt of payment, currency specifications, payment address, and specifying that checks and money orders should only be sent through the mail.

Also, the OSC states that payment requirements for services should be reasonable for consumers. In other words, it should not be difficult for an individual to make payments against their loan. Therefore, your forms and disclosure provider must be familiar with payment regulations in order to know how to best serve the needs of your credit union. Payment coupons, online payments, initial loan servicing agreements – all of these are associated with Regulation Z payment requirements.

Credit Cards

It’s important to understand how Regulation Z works in conjunction with credit card products you offer. For instance, one of the Credit Card Act components states you may not raise a member’s APR or fees associated with their credit card account unless you provide them with a 45-day advanced notice exception.

Yet, associated with this exception is a rather large compliance elephant in the middle of the room. The 45-day notice exception may not be used within the first year of a member opening a credit card account. For this reason, across-the-board increases must include some sort of monitoring to determine which members have opened credit card accounts within the past 12 months, so any increase can be delayed until the physical year has ended.

In addition, credit unions are required to evaluate accounts with an increased APR every six months. They must review the rationale behind the rate increase and document their decision to either reduce or not reduce the APR on the credit account. However, should a member’s credit account ever be reduced to the original APR, the obligation ends.

There are also other restrictions associated with penalty fee caps and reducing credit limits. However, the restriction with the most potential to create a compliance issue for credit unions involves credit card accounts for members under the age of 21. In this instance, the member must display their own ability to pay at least the required minimum payment, or have a cosigner/joint applicant who is willing to assume liability should the underage member default.

The important thing to remember is this requirement stretches beyond simply opening the account. Regulation Z mandates that credit unions obtain written consent by the cosigner prior to any credit limit increase on the account of a member under the age of 21.

Again, it is extremely helpful to have a forms and disclosures provider familiar with these restrictions. When you deal with Regulation Z on a regular basis, your forms become critical to efficient operation and service. Outdated, non-compliant forms will not work. You must fully understand how Regulation Z impacts your credit union to keep your forms and disclosures compliant.

Remember, the heartbeat of Regulation Z is consumer protection. While it may present some compliance challenges, it ultimately serves to protect your interests as well. Regulation Z fosters full disclosure and transparency, which lays the foundation for member trust and loyalty. Maintaining compliance shows your members they really do matter.

Richard Gallagher is CEO of Oak Tree Business Systems, Inc. He can be reached at 800-537-9598 or clientservices@oaktreebiz.com.