Allowing Your Members to Skip a Payment (Or Two) on Open-End Credit
Yesterday, we blogged about the recent NCUA guidance detailing their response to the ongoing pandemic. In the guidance, NCUA “encourages credit unions to work with affected borrowers” and offers numerous options for how credit unions can achieve this. One option NCUA poses is allowing members to defer or skip loan payments. Even though NCUA suggests this option, there are still compliance issues to consider before doing so. Today’s post reviews these considerations when allowing members to skip a payment for open-end credit, such as credit cards or lines of credit.
As a starting point, whether a member is permitted to skip a payment will be determined by the credit agreement between the credit union and its member. Credit unions will want to review these agreements to determine whether they already include a skip payment option. If a credit union determines this is not included in the agreement, have no fear, you can still help your members. In that case, credit unions can enter into a separate agreement with the member that modifies the original agreement and permits members to skip payments. The terms of the original agreement or any separate agreement will also determine how many payments the credit union will permit a member to skip.
Determining whether the skip payment option is already part of the original credit agreement is important because it will determine the rules that will apply when a member decides to take advantage of this option. Comment 2 to section 1026.9(c)(2)(v) of Regulation Z explains a change in terms notice covering the terms of the skip payment arrangement is not required when the terms were already outlined in the original credit agreement.
On the other hand, if the credit union is executing a separate agreement with the member, section 1026.9(b)(1) provides the requirements for the agreement. The rule requires the agreement to disclose the terms that will apply, or a statement that the original credit terms will apply to the new feature, and any new or different finance charges that will apply. The agreement may also address other terms, such as whether interest will continue to accrue. The commentary also explains a change in terms notice is required before the original payment schedule resumes. The rule does not provide a specific advance timing requirement; however, the commentary explains the change in terms notice can be provided with the separate agreement offering the skip payment option.
When it comes to how the member may request a skip payment order, this will also be determined by the agreement or a credit union’s internal loan policy. For example, some credit unions allow requests through online banking or via telephone. Credit unions currently requiring in-person requests may want to consider amending its loan policies to allow remote requests under the current circumstances.
Nothing in the rules prohibits credit unions from charging a fee for skipping a payment. Where this was contracted for in the original credit agreement, credit unions do not need to take any further steps and may impose the fee. However, if the fee was not included and a credit union wishes to impose one, then section 1026.9(c)(2)(iii) requires notice of the new fee. The rule permits credit unions to provide notice following either the 45-day advance notice rule or providing notice any time before the member becomes obligated to pay the charge, such as in the separate agreement.
Depending on how the fee is imposed, it could also be considered a finance charge under section 1026.4. This NCUA legal opinion letter explains when a fee is charged each time a member skips a payment, it is considered a finance charge. If the fee is instead charged for the skip payment option and imposed regardless of whether the member exercises that option, then the fee is not a finance charge. If a credit union determines its fee is a finance charge, then the rules require that fee be included in the APR calculation.
While credit unions may impose a fee for skipping a payment, keep in mind that waiving fees was also an option offered in the NCUA guidance as a way for credit unions to help their members. If you have questions on other ways you can assist your members, NAFCU is here to help. Members can reach out to the team at email@example.com. If your credit union is implementing a plan to assist your impacted members, we would like to hear more about these efforts as well.