Please note the correction below, at the end of the first section. A reference to “closed-end loan agreements” was changed to “open-end loan agreements.”
NEWS: The League now offers an open-end credit payment waiver agreement form for sale. The Wisconsin Open-End Credit Payment Waiver Agreement WCUL #83004 (Rev. 10/20) allows the credit union and borrower(s) to agree to waive the payment requirements on one or more specified due dates on a line of credit. It cannot be used to make other changes, such as to the interest rate, payment level, draw period, etc.
WCUL #83004 may be used to help borrowers facing difficulties during the COVID-19 pandemic, but that is not the only time to use it. It can be used whenever the need arises to waive one or more payments on a line of credit documented on a WCUL Kwik-Cash or R.E.A.P. form. The form makes this possible without a rewrite of the line of credit agreement and without new Truth in Lending account opening disclosures.
The open-end payment waiver form is specifically meant for use with the WCUL Kwik-Cash and R.E.A.P.® HELOC agreements, not other vendors’ loan forms. The form is designed for loans subject to Wisconsin law. It has been approved by the Wisconsin Department of Financial Institutions as compliant with the Wisconsin Consumer Act. The Wisconsin Department of Financial Institutions states that if the borrower agrees to pay a waiver fee in this form, it may be imposed even if the fee was not listed in the original line of credit agreement.
A sample copy of WCUL #83004 is available here. The line-by-line instructions for completing the form are available here. ii Release No. B046 – Consumer Kwik-Cash Loans and ii Release No. B064 – R.E.A.P. & Home Equity Lines of Credit will be updated to describe the form and furnish the line-by-line instructions.
- The form must be signed by a credit union representative and all borrower(s). It specifies the date when the regular payment schedule resumes. As a result, no other notification is required by Truth in Lending or the Wisconsin Consumer Act. However, a credit union will normally bill the borrower in advance on their monthly statement, stating the upcoming due date and minimum monthly payment.
- The form introduces some risk to the extent that the waiver of payments results in extending the maturity or payoff of a R.E.A.P. HELOC. Modifying a mortgage loan may jeopardize the lien priority of the credit union’s recorded mortgage if the changes are deemed to prejudice, or adversely affect, the protection of a junior lienholder. This is a risk-based concern that will vary from one situation to another. That seems more likely to emerge as an issue if the waiver takes place close to the end of the draw period, or after that point. This is not an issue on Kwik-Cash, which cannot be secured by real estate. A Wisconsin law firm advises:
A loan modification may put your mortgage lien priority over junior lienholders at risk. In some cases, the risk may be significant and in others, minimal. As a general matter, the more changes you make in a modification, the greater chance of it affecting the lien priority. On the other hand, just lowering the interest rate without increasing the loan balance is more harmless. Your attorney can help you evaluate the risk, which may vary from loan to loan, and how to address it. Sometimes the risk will require the recorded mortgage to be modified, or replaced by a newly recorded mortgage. A subordination agreement from a junior lienholder may also be required to protect mortgage lien priority.
We cannot assure that this form is appropriate for use with other vendors’ closed open-end loan agreements. Consult your attorney if tempted to use it with non-WCUL forms.
Truth In Lending issues
Is a change-in-terms notice required?
- Kwik-Cash. Reg. Z typically requires a notice 45-days in advance of a change to the terms disclosed for a non-HELOC open-end credit plan. The Reg. Z Commentary at §1026.9(c)(2)(v)2 indicates that no notice is required prior to a reduced payment schedule, as with a skip, but that the creditor must give notice prior to resuming the original payment schedule. It goes on to say that the change-in-terms notice may be combined with the notice offering the reduction. The WCUL #83004 form facilitates this approach, providing a space to specify the date when the required monthly payments will automatically resume.
- R.E.A.P. The change-in-terms notice requirements applicable to HELOCs, when the terms can be changed at all, normally require a notice 15 days in advance of the effective date of a change in disclosed terms. But as described above for Kwik-Cash, the Reg. Z Commentary, this time at §1026.9(c)(1)(ii)2, says that no notice is required prior to a reduced payment schedule, as with a skip, but that the creditor must give notice prior to resuming the original payment schedule. It goes on to say that the change-in-terms notice may be combined with the notice offering the reduction. The WCUL #83004 form facilitates this approach, providing a space to specify the date when the required monthly payments will automatically resume.
Do the Reg. Z limitations on changes to the terms of a HELOC prevent use of the open-end waiver form on R.E.A.P. lines of credit?
- Reg. Z’s special rules for HELOCs severely restrict the ability of a creditor to change the terms of such plans. But the Commentary at §1026.40(f)(3)(iii) provides that a creditor may change the terms if the consumer expressly agrees in writing to the change at the time it is made. The WCUL #83004 form documents that agreement regarding the waiver of the specified payments.
Wisconsin Consumer Act issues
As mentioned earlier, the WCUL #83004 open-end payment waiver form is designed for loans subject to Wisconsin law and has been approved by the Wisconsin Department of Financial Institutions as compliant with the Wisconsin Consumer Act (WCA).
What about Wisconsin’s change-in-terms notice requirements?
Use of the new form achieves compliance without a separate notice. The WCA generally requires a change-in-terms notice 90 days prior to the effective date of any change that is:
- adverse to the interests of the customer with respect to outstanding balances, or
- that imposes or alters a permitted charge.
The payment waiver could be considered adverse to the interests of the customer because it would result in an increase in the amount of subsequent periodic payments. But the 90-day advance notice is not required if the customer agrees in writing to the change, as with use of the WCUL §83004.
Does the WCA prohibit charging a waiver fee when the new form is used?
The Wisconsin Department of Financial Institutions states that if the borrower agrees to pay a waiver fee in this form, it may be imposed (even if the fee was not listed in the original line of credit agreement).
Other compliance issues
In Letter to Credit Unions No. 20-CU-13: Working with Borrowers Affected by the COVID-19 Pandemic (April 2020), the NCUA said:
When providing temporary loan modifications, credit unions should consider the borrower’s ability to repay the debt at the end of the temporary modification period, especially if the modification will result in higher payments or a balloon payment. Prior to providing the relief, credit unions should ensure borrowers are aware of the terms of any temporary modification and potential impact on the loan balance and future payment.
Credit bureau reporting. Credit bureau reporting must be accurate. Consult the credit bureau for any special guidance or requirements they may have for properly reporting payment skips, waivers, or deferrals or other loan modifications.
Late fees. When a credit union agrees to waive or defer a payment, it cannot charge late fees when the consumer pays by the rescheduled payment due date. This may seem obvious, but some institutions fail to make the appropriate adjustments on their data processing systems and end up improperly charging late fees.
Credit insurance, payment protection, GAP, etc. The credit union should analyze whether waiving a series of payments may affect any credit insurance, debt cancellation, debt suspension, GAP, warranties, or other products sold in connection with the line of credit. Consult the vendors of those products for guidance.
Tattle-tale notice. If the Wisconsin Marital Property Act applies to a couple, then a credit union must send a “tattle-tale notice” to a non-obligated spouse when it “extends credit” to a married person if (1) the credit is subject to the WCA, and (2) it is incurred in the interest of the marriage or family. But the tattle-tale notice is not required for a modification using the Loan Modification Agreement – Interest Rate and Payment Reduction form. That’s because the credit union is not extending new credit. The law provides:
The term [extends credit] does not include renewals, extensions, modifications, or the use of an open-end credit plan. Wis. Stats. § 766.56(3)(a).
Extra compliance issues for R.E.A.P. HELOCs
Escrow payments. This form does not waive escrow payments. If a R.E.A.P. loan requires escrow, be sure the borrower understands that the monthly escrow payments must continue as scheduled.
Title insurance. Contact the credit union’s title insurer for guidance on whether your payment waiver on a HELOC may affect your title insurance protection on a mortgage.
Use caution if the loan term will exceed 30 years as a result of a payment waiver. Check to see whether use of the open-end credit payment waiver form may extend repayment beyond 30 years from the date the R.E.A.P. mortgage was recorded. The Office of Credit Unions’ 30-year limit on the terms of a mortgage loan by a state-charted credit union is reset by the date of any properly executed loan modification agreement. See Wis. Admin. Code DFI-CU 54.03(3). But other Wisconsin law limits the effectiveness of recorded mortgages after 30 years. If the credit union will need to rely upon a mortgage for more than 30 years, a remedy may be available. Consult your attorney about drafting and recording a special notice that may renew the enforceability of a potentially stale mortgage for another 30 years from the date the notice is recorded. See Wis. Stats § 893.33 and § 706.09.
Flood insurance regulations. Modifications that increase, extend, or renew a real estate or mobile home loans can trigger: (1) the need for a new flood hazard determination, or (2) the need to establish an escrow account for any required flood insurance if the maturity of the loan is extended.
- A credit union that is increasing, extending, renewing or purchasing an existing loan may rely on a previous flood hazard determination only if the previous determination is less than seven years old, it was recorded on a special flood hazard determination form, and the credit union verifies that no FIRM or FHBM map revision has been issued. If a new map has been issued, the credit union must complete a new special hazard determination form using the new map.
- NCUA flood insurance regulations require lenders/servicers to escrow premiums and fees for flood insurance for any loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016 – unless either (1) the credit union qualifies for a “small lender” exemption, or (2) a particular loan is exempt.
Regulatory guidance
See ii Release No. B072 regarding the NCUA Interpretive Ruling and Policy Statement (IRPS), if applicable, on loan workouts, nonaccrual policy, and regulatory reporting of troubled debt restructured (TDR) loans. As with any loan modification, it is the facts and circumstances that determine whether the NCUA guidance on loan workouts and troubled debt restructurings (TDRs) apply. Regulators have issued temporary guidance in the NCUA’s Letter to Credit Unions No. 20-CU-13: Working with Borrowers Affected by the COVID-19 Pandemic (April 2020), and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). Section 4013 of the CARES Act allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. Management should ensure loan modifications are reported properly on the Call Report to convey the credit union’s risk profile accurately.
Availability of form
Credit unions may purchase the new form online at theleague.coop > Solutions > Credit Union Forms > Consumer Loan Forms. See the April 28, 2020 Compliance Courier: Purchasing League Forms 101.
For questions about use of the form, please call the League’s Compliance Hotline at (608) 640-4050 or email the Compliance Mailbox.