Risk Alert for Edu CU's with Skip-A-Pay Programs - FINANCIAL-24
As the holiday season approaches, members often look for creative ways to make ends meet. In fact, many credit unions look to enhance the member experience by offering programs that allow members to skip a loan payment at this time of year. It is important to ensure your program is compliant with all federal and state laws, and that disclosures are provided accurately and timely.While skip-a-payment programs are legit and beneficial, the NCUA has cautioned credit unions to understand how disclosure requirements for open-end credit differ from the disclosure rules for closed-end credit. Generally, allowing members to skip a payment without a refinance on closed end loans does not trigger a change in terms notice. Open end loans, however, may be another story.
Unless the terms of the program are accurately disclosed on the account opening documents a change in terms is usually necessary. Regulation Z states that if a credit union allows consumers to skip one or more payments during the year, no notice of the change in terms is required either prior to the reduction or upon resumption of the higher rates or payments if these features are explained on the initial disclosure statement. This includes an explanation of the terms upon resumption. Otherwise, the creditor must give notice prior to resuming the original schedule. The change-in-terms notice may be combined with the notice offering the payment skip.
For example, the periodic statement reflecting the skip feature can be used to notify the consumer of the resumption of the original schedule or rate, either by stating explicitly when the charges resume, or by indicating the duration of the skip option. Language such as “You may skip your October payment,” or “We will waive your finance charges for January,” may serve as the change-in-terms notice.
Loans secured by real estate can require substantial contractual modifications making them a less attractive option for most skip a payment programs. Reviewing the specific nuances of your program is imperative in understanding disclosure requirements.
Additionally, the use of skip a payment programs could also afford a dishonest employee with the opportunity to mask delinquency numbers. Proper separation of duties and oversight are critical in preventing any internal manipulation.
Protect your credit union by implementing these loss controls:
* Review marketing material and disclosures to ensure program terms are accurately depicted. At a minimum, the credit union should disclose:
- Eligibility requirements
- Eligible Loans
- Restrictions
- Fees
- Impact to finance charges
- Reduction to GAP or Warranty Coverage (when applicable)
- Changes in terms (when applicable)
- How automatic payments will be treated
* Consider including payment skip program language in new loan disclosures
* Consult an attorney to ensure compliance with all state and federal requirements
* Train employees to be aware of the program to ensure all members receive fair and equitable treatment
* Dedicate an employee without the authority to process payment date changes to review skip-a-payment transactions for legitimacy
Access CUNA Mutual Group’s Protection Resource Center at cunamutual.com for exclusive Risk Management resources to assist with your loss control needs. The Protection Resource Center requires a User ID and password.
Learn more about Regulation Z (Truth In Lending).
Contact CUNA Mutual Group Risk Management at 800.637.2676 or use Ask a Risk Manager for additional risk insights and to learn how Risk Management can assist your credit union.
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