Written by Stephanie Lyon, Regulatory Compliance Counsel
I recently walked into a store to buy puppy food and between the Halloween treats, fancy Thanksgiving table decor and winter holiday ornaments, I was instantly reminded that the holiday season is right around the corner. Skip-a-pay programs are offered by many credit unions and are especially popular around major holidays. These programs are designed to give members a little extra spending money by allowing certain borrowers to skip a loan payment and resume payments during the next pay period. While each credit union’s program may be unique, some regulatory guidance exists pertaining to the components of skip-a-pay programs.
Notification Requirements for Loan Modifications
Regulation Z has various disclosure requirements for skip-a-pay programs depending on whether the loan is open or closed-end credit. For non-home secured open-end credit, the commentary to section 1026.9(c)(2)(v) states that credit unions are generally not required to issue a change in terms notice if the skip-a-pay program was properly explained in the account-opening disclosures. Otherwise, Regulation Z requires credit unions to give prior notice before resuming the original payment schedule even though prior notice would not be required before skipping a payment. See, 12 C.F.R. § 1026, Supp. I, cmt. 1026.9(c)(2)(v) – 2. The official interpretation to section 1026.9(c)(1)(ii) contains similar guidance for home-equity lines of credit. See, 12 C.F.R. pt. 1026, Supp. I, comment 1026.9(c)(1)(ii)-2.
As for non-home secured close-end loans, implementing a skip-a-pay program could be more challenging as the program may require a modification to the existing loan agreement. This type of modification would typically not trigger additional disclosures under Regulation Z unless the original obligation has been cancelled and substituted by a new obligation. See, 12 C.F.R. § 1026, Supp. I, cmt. 1026.20(a)-1.i. Home-secured closed-end loans add an additional layer of complexity because allowing a skipped-payment can create issues related to flood certifications and negative amortization. If the credit union is contemplating skips on real estate loans, it may want to discuss this with local counsel. Keep in mind that real estate transactions are largely governed by state law and skips could impact the credit union’s legal recourse.
In addition to Regulation Z, a couple of things to consider when making loan modifications are:
- Will the credit union require all of the borrower(s)’ signature and consent prior to modifying the loan? From a contract enforceability perspective, when there is a co-borrower and the credit union is willing to modify the terms of the note, state law may require that both signatures be on the modification or the credit union may not be able to enforce the contract against the borrower who did not sign.
- How is the member making up the skipped payment? For example, if the credit union adds another payment at the end of the maturity, this may extend the loan period and hence require a contract modification.
In addition to notification requirements under Regulation Z, Regulation B and to some extent the Fair Credit Reporting (FCRA) may require credit unions to issue adverse action notices to members that have applied for the skip-a-pay program and are denied. Under Regulation B, a member’s request to skip may be considered an application for the extension of credit. See, 12 C.F.R. §§ 1002.2(j) (defining “credit”); 1002.2(q) (defining “extension of credit”). Hence, the refusal to grant a skip-a-pay application could be considered an “adverse action” under Regulation B and require the credit union to send an adverse action notice. See, 12 C.F.R. §§ 1002.2(c)(1)(i) (defining “adverse action”); 1002.9(a)(1)-(2) (requirement to send an adverse action notice). One thing to keep in mind is that the rule generally does not require a credit union to send an adverse action notice to members whose account is currently delinquent or in default. See, 12 C.F.R. § 1002.2(c)(2)(ii).
The credit union may also have an independent obligation under the FCRA to send an adverse action notice if the credit union relied on a “consumer report,” such as a credit report issued by a reporting agency, to deny the application. 15 U.S.C. § 1681m. The FCRA definition of “consumer report” includes any “written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living…” 15 U.S.C. § 1681a(d)(1). This term does not include, however, information relating to the credit union’s own experiences with the member. See, 15 U.S.C. § 1681a(d)(2)(A)(i).
Skip-a-pay programs can be a great service to members. The credit union may just want to ensure it either anticipates these programs in the loan agreement or is prepared to properly modify contractual agreements under state law. If the skip-a-pay program is new to the credit union, refresh your recollection of Regulation Z’s notification requirements and any adverse action requirements that may be imposed from declining a skip-a-pay request.
In honor of the impending fall and the inspiration for my puppy’s Halloween costume, here is a cute pugkin spice latte. I think Chewie could rock this, but I am open to suggestions.