Credit unions today are tasked with adapting to many additional compliance responsibilities, and perhaps the most pressing among these are the new regulatory changes that must to be implemented by January 2014. But instead of positioning themselves defensively, cooperative financial institutions should recognize that these changes may actually present hidden opportunities to connect with their members — if viewed with the proper perspective.
Consumer protection principles have once again been brought into the spotlight with Regulation Z and credit unions will need to revisit some of their disclosure practices to make sure they are, indeed, best practices. The heart of the issue involves the ability of members to pay back their home mortgages. Richard Cordray, director of the Consumer Financial Protection Bureau, published an article recently that addresses the changes under the "Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act" (Regulation Z). The article makes a point to note that the purpose of the regulatory change is to make sure lenders offer mortgages their borrowers can actually pay back.
The reason for the change speaks to the fundamentals of consumer protection and focuses on the lending industry as a whole. Cordray essentially states that, over time, lending institutions became unconcerned as to the potential of borrowers to pay back their loans because there were other ways of meeting the demand of the notes. The notion was that rising housing prices (values) would certainly help offset foreclosures, and there was always the possibility of unloading these loans on the secondary market. However, the landscape soon changed. Housing prices (and their corresponding values) dropped rapidly and significantly, bringing with them a skyrocketing foreclosure rate. The secondary market responded in kind by bullishly taking on new loan purchases.
This regulation hopes to correct this problem by going to the supposed root of the issue: consumer information. Three points of focus for change are as follows:
Potential borrowers must supply financial information and lenders must verify it.
To qualify for a particular loan, a consumer must have sufficient assets or income to pay back the loan.
Lenders will have to determine the consumer's ability to repay both the principal and the interest over the long term, not just during the introductory period when the rate may be lower.
Regardless of whether or not you agree with Cordray’s assertions that the lending industry is responsible for consumers’ ability to repay their mortgages, the regulatory change is now a reality that must be dealt with.
Instead of posturing defensively, cooperatives can use the regulation as an opportunity to connect with their members. Although credit unions have always worked diligently to keep borrowers out of harm’s way, they did end up inadvertently playing at least a minor role in the life-changing fall that so many individuals experienced.
Going forward, credit unions can continue to set themselves apart by doing everything in their power to avoid a repeat of history. As the new rules begin to become reality, keep the following things in mind to be safe:
First, be sure to explain all of your lending programs adequately, especially those that entice members with lower payments for the first few years only to end up with higher payments later on due to fluctuating interest rates or amortization schedules. Remember, an informed member is the primary goal of the Regulation Z change.
Second, but equally important, make sure your lending forms are up to date. Although many credit unions do what they can using internal resources, getting the job done and done right the first time is crucial with these sorts of regulatory changes. For that reason, outsourcing to experts is more important than ever.
Making sure your documents comply with all state and federal guidelines is exactly what Oak Tree has specialized in for 30 years — day after day and only for the credit union industry. Oak Tree has even gone the extra mile by offering online ordering through their website oaktreebiz.com. Click "Buy Now," fill out the short form, and submit, and your lending forms will arrive ready for use with the newly updated information.
Once your forms are updated and in order, be sure to go over all loan information with your borrowers. It is not enough to simply hand the documents to the member and say due diligence has been served. On the contrary, the details of these agreements should be fully explained. The form itself simply acts as a reference guide for the member should they have any questions later on.
At the end of the day the primary reason members choose to do business with a credit union over a bank is that they feel a closer, more personal bond with a local cooperative. Why not use Regulation Z as a chance to reinforce these sentiments and encourage more new members to walk through the door? It might require more time, but in time, it will be well worth it.
Genelle Rich is President of Oak Tree Business Systems, Inc., a premier custom forms provider celebrating their 30th Anniversary in the Credit Union Industry. For more information, contact firstname.lastname@example.org or call 800-537-9598 or visit www.oaktreebiz.com.
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