Bifurcated or Hybrid Loans
We've had a few questions about NCUA's recent legal opinion letter on lines of credit and maturity limits. It is NCUA Legal Opinion Letter 07-1024. To the best of my knowledge, they have yet to post it on their website. But here's a link where you can locate it. The letter does a few things. First, it indicates that if a loan qualifies as open-end credit union Regulation Z, then NCUA's maturity limits do not apply.
But the letter also changes a long-held position by NCUA. The letter supersedes NCUA Legal Opinion Letter 92-0232, which indicated that certain home equity products were either open or closed-end in nature. NCUA referred to these as "bifurcated" or "hybrid" loan products, which had an open-end period and a closed-end period. Through bifurcated products, NCUA indicated that credit unions could offer 30-year products, as long as the repayment period (the closed-end portion) did not exceed 20 years.
NCUA's new position is that loans must be either open or closed-end in nature. In their words:
Upon reconsideration, we believe OGC Op. 92-0232 is incorrect in concluding that a loan could be neither open-end credit nor closed-end credit; in the 15 years since it was issued, the opinion has created some confusion. Accordingly, we will remove OGC Op. 92-0232 from NCUAâÂÂs website; this letter supersedes that opinion letter and clarifies our interpretation regarding application of the Regulation Z definition of open-end credit in determining if a loan product is a line of credit for purposes of NCUA regulations.
NCUAâÂÂs interpretation of Regulation Z, confirmed as correct by legal staff at the Fed, is that any extension of consumer credit is either open-end credit or closed-end credit. Accordingly, an extension of consumer credit by an FCU meeting the Regulation Z definition of open-end credit is, for NCUAâÂÂs purposes, a line of credit and not subject to maturity limits. An extension of consumer credit by an FCU that does not meet the Regulation Z definition of open-end credit is, therefore, closed-end credit and subject to applicable maturity limits under the FCU Act and NCUAâÂÂs regulations.
If your credit union offers bifurcated or hybrid loans, you should read and understand Legal Opinion Letter 07-1024.