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August 12, 2009

Comments

Wendy Bailey, Mgr

Our small credit union finds that manually moving all dates to Oct 1st is our only option - the net effect (skip) is the same. We are sending a letter with the stmt and we believe that most will make the pmt. If credit unions accrue their loan interest, their income will not be affected. What we will see is a large increase in expenses- postage, work, supplies- not to mention the confusion for our members who won't understand a different due date than the bi-weekly pmts we will continue to allow them to make.

Maureen Shedden

Anthony, my Lending folks are stating that "The problem with the skip solution is the member ends up paying two months worth of interest in the next payment. If their loan balance is big enough the might not pay any principal at all, which leads to negative amortization." Has that issue been discussed?

Anthony Demangone

Hi Maureen,

The Fed hasn't discussed this issue within its interim final rule. But one could disclose with the skip that interest would continue to accrue. Members would have the choice to continue to pay as they have, or to take advantage of the extra time. The added interest is an issue to confront, but I don't know that it makes this solution impossible.

Rex Wangsgaard

Let's say you move all the payments to October. What happens if members decide not to pay until then. September statements then go out with an October due date. Oops, I no longer comply with the 21 day rule.

Anthony Demangone

You may be confusing a collection versus notification. Let's say you send your August statement in early September with an October due date. Who cares when the member makes their payment for purposes of the 21-day issue. They received the statement with enough time. Next, you send them their September statement in early October. For that cycle, you show that they must make a payment by November. That doesn't mean they still don't owe the last payment. The 21-day requirement will be met again. Members are getting notification about their due dates with enough time. You then have to track whether they make their payments on the back end.

Rex Wangsgaard

These are simple interest loans that do not "cycle" like credit cards. They have a due date and until that payment is satisfied it is not "bumped" to the next month. Just like a closed end auto loan. I believe this is more the norm in the Credit Union world vs. banks that "cycle" loans.

Anthony Demangone

That certainly is an issue to consider. While you mention that these are simple interest loans that do not cycle, that doesn't completely line up with Reg Z. Regulation Z's open end rules demand that you disclose the end of the cycle for open-end loans within the periodic statement. So if an auto loan is open-end, there's a cycle. That's part of the problem that we are running into. In many ways, we've treated these loans like they were closed-end for years. This transition is a nightmare. (Case in point, how many credit unions issued coupon booklets for these open-end loans?) In any event, I really appreciate the comments, Rex!

Anthony Demangone

That cycle/periodic statement requirement can be found at 12 C.F.R. Part 226.7(g).

Dora Vogel

This would work for loans that have an existing monthly payment frequency but I don't see how it would work for other payment frequencies, unless I'm missing something. If a loan has a payment frequency of weekly, biweekly or semi-monthly (and many of ours do), skipping September would make the next biweekly payment due in October, but it would not give the required 21 days notice before the next biweekly payment is due, a mere 14 days later. Great solution if all of your loans have a monthly payment frequency!

Wendy Bailey, Mgr

we will be converting ALL loans to monthly payments but allowing a bi-weekly payroll deduction to still be applied to the loan- two bi-weekly payments will cause the due date to roll over- we have an incredible amount of work ahead of us to make all these changes manually- but, we believe we will be incompliance

Anthony Demangone

Wendy - congrats! Good luck with the changes, and be sure to document all your hard work to show all you did to comply should an examiner ask questions.

- Anthony

Houston Watson

Can you simply convert the open-end loans to a closed-end loan? If so, are there any statutory requirements with which you must comply?

Anthony Demangone

Hi Houston - no, there's no mechanism available to convert an open-end loan to a closed-end loan. Other than a re-finance.

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