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Not-So-Automatic Payments

With the amount of change we’ve had in the regulatory compliance space in the past five years it’s easy to get focused on the future. What is the next rule coming our way? But, a not-so-new rule has come up multiple times for me in recent weeks, as part of conversations with credit unions. That rule is the prohibition of compulsory use in Regulation E, 1005.10

Here’s the citation:

(e) Compulsory use. (1) Credit. No financial institution or other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer’s account.

As of April 1, 2018, an additional exception will be included for prepaid cards with a separate credit feature.

While a credit union cannot require automatic payments, it can offer a reduced APR or other cost-related incentive as a method to entice members to select this option. For example, it is quite common for a credit union to offer a discounted rate to a member who elects to make automatic payments. The most common figure I have seen is a .25% rate reduction. But, I have seen credit unions offer as much as a .75% discount to those that choose to go the automatic payment route.

However, a credit union that chooses to offer a discounted rate for automatic payments should keep a couple of things in mind, from an operational perspective.

The first is with regards to advertising of rates. Obviously, the credit union will prefer to promote the best rates and terms that are available. This may include an advertisement of the APR that would be applicable for a loan which includes the rate reduction for automatic payments. This is perfectly acceptable however, I would recommend that the rate is referred to as being “as low as ___% APR” with a disclaimer that informs consumers that this rate includes a rate reduction of __% for electing to make automatic payments.

The second thing a credit union should consider is how it plans to address situations in which the member later revokes his or her consent for automatic payments. If the credit union plans to increase the applicable rate accordingly, it will need to ensure that the loan is disclosed as having a variable rate feature. Alternatively, a credit union may continue to apply the discounted rate despite the member’s revocation. In my experience, credit unions typically go the path of the latter.

Hopefully your credit union is already on top of this issue and my post is simply a refresher. Others may be surprised to find that Regulation E (which generally applies to deposit accounts) contains a provision that impacts the underwriting and servicing of loans. If you’re in the second group, and you need a hand, feel free to reach out to me.  I’m always happy to talk compliance.

 

 

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