Compliance Blog

Written by Jennifer Aguilar, Regulatory Compliance Counsel

As I am sure you have all heard by now, NAFCU hosted its Regulatory Compliance School a few weeks ago here in Arlington. It was a great conference and we were pleased to welcome a new class of NCCOs! Don’t worry if you missed it, you can still join us for Fall Regulatory Compliance School in San Antonio.

One issue discussed at School was the mortgage periodic statement exception for charged-off loans. After this discussion I was asked if this exception also applies to HELOCs. With the compliance deadline coming up next week, periodic statements have become a bit of a hot topic in our compliance inbox and this question has come up a couple times. While that particular exception does not directly apply to HELOCs, Regulation Z does contain a similar periodic statement exception for open-end credit. To help frame the scope of each exception, they are both discussed below.

Mortgages

Section 1026.41 generally requires credit unions to provide periodic statements for all closed-end mortgage loans. Under the rule, a mortgage loan is any closed-end transaction secured by a dwelling. This requirement is not limited to just the member's principal dwelling or a first lien. So, both first mortgages and any dwelling secured second mortgage, such as a home equity loan, are covered under the rule. For all mortgage loans, a periodic statement must be sent each billing cycle.

The rule provides a number of useful exceptions, including one for small servicers and certain borrowers in bankruptcy, though the bankruptcy exception will become much narrower after next week's compliance deadline. As noted above, today's focus is on the charged-off loan exception. Section 1026.41(e)(6) explains that credit unions do not need to send periodic statements for loans that it has charged-off if all of the following conditions are met:

1. The loan has been charged-off according to loan-loss provisions,
2. The credit union will not charge any additional interest or fees on the loan, and
3. The credit union provides the "Suspension of Statements & Notice of Charge Off" disclosure within 30 days of the charge-off or most recent periodic statement.

The Suspension of Statements disclosure must explain that the loan has been charged-off, that the credit union will not charge any additional interest or fees, that the borrower will not receive any more statements, that the lien remains on the property, that the loan is not being canceled or forgiven but may be assigned or transferred and that the borrower may be required to pay the outstanding balance in the future. If all of these conditions have been met, the credit union does not have to send periodic statements. However, if the credit union later fails to treat the loan as charged-off or imposes interest or fees on the loan, then under the rule, the credit union must begin sending periodic statements again.

Open-End Credit

For all open-end credit plans, both home-secured and not home-secured, section 1026.5(b)(2) provides the general requirements for delivering periodic statements. Under the rule, a periodic statement is required for each billing cycle where one of the following is true: (1) there is a debit or credit balance of more than $1 at the end of the billing cycle, or (2) the credit union imposed a finance charge on the account during the billing cycle. As long as one of these events has occurred, a statement is required.

Like the closed-end mortgage rule, section 1026.5(b)(2) also provides a few exceptions to the periodic statement requirement, such as when the credit union has determined that the account is uncollectible or when the credit union has initiated collection proceeding; though there is no exception for borrowers in bankruptcy. Also like the closed-end mortgage rule, this rule provides an exception for charged-off loans. As long as the credit union has charged-off the loan according to loan-loss provisions and will not charge any additional interest or fees on the loan, it does not have to provide periodic statements. Unlike the mortgage rule, credit unions are not required to provide any particular disclosure or notice when it stops sending statements for open-end credit.

When working through charge-offs credit unions will want to review any internal policies and may also find it helpful to review NCUA's Loan Charge-Off Guidance and IRPS on Nonaccrual Policies.

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