November 17, 2011
As the holidays and New Year quickly approach, many credit unions may be wondering about running a “skip-a-payment” promotion. But what have all the changes to Regulation Z done to these programs?
According to the Credit Union National Association (CUNA) CompBlog, Regulation Z still permits a credit union to offer skip payments to its members on selected loans, whereby a member may skip a loan payment at certain times during the year, such as during the Christmas season. Furthermore, Regulation Z does not prohibit a credit union from charging a fee to any member that elects to skip a loan payment. However, prior to July 2010, Regulation Z required the skip payment fee to be incorporated into the effective annual percentage rate (APR) and disclosed on the corresponding periodic statement for open-end loans. Under the Regulation Z open-end loan changes that became effective on July 1, 2010, the requirement to calculate an “effective” APR was eliminated. Instead, credit unions must now include the skip payment fee in the list of transactions on the periodic statement and also itemize the skip payment fee in the fee boxes for the month and year-to-date.
In addition, the amount of the skip payment fee must be included in the calculation of the credit union’s APR for usury purposes, because it is considered a finance charge under Regulation Z. The fee is considered a finance charge regardless of the source of the fee—whether the fee is paid in cash, deducted from the members' share or share draft account, or charged to the loan balance.
Under the Federal Credit Union Act, federal credit unions are subject to a 15-percent interest rate ceiling unless the National Credit Union Administration (NCUA) establishes a higher interest rate ceiling during its 18-month review. At its last review, the NCUA opted to continue the current 18-percent rate as the interest rate ceiling for loans made by federal credit unions. This 18-percent ceiling is effective until the NCUA determines otherwise.
The act also states that the interest rate limit is “inclusive of all finance charges.” Since a skip payment fee is considered a finance charge under Regulation Z, federal credit unions must include the amount of the skip payment fee in the determination of the loan’s APR for NCUA usury purposes.
This limitation does not apply to either Oregon or Washington state-chartered credits unions. Provisions in both states allow state-chartered credit unions to have interest rates that exceed 18 percent.
Check in next week for more information about disclosure requirements for skip-a-payment programs.
Questions? Contact the Compliance Hotline: 1.800.546.4465, email@example.com.