The compliance team is often asked whether there is a federal regulation that limits the number of days a loan can be paid ahead. While there is no federal regulatory limit on how far in advance a loan can be paid, there are a few risk management practices and contractual limitations the credit union may want to consider.
To begin with, the credit union’s loan agreement with the member may govern how payments are applied to the loan. For example, there may be a clause in the agreement regarding how payments in excess of the principal, interest and escrow (if any) will be applied such as advancing the due date or paying down the principal. Generally, ambiguities in a contract are left to state law interpretation so it is important to ensure contract clauses regarding the application of payments are clear. If the credit agreement is silent on the matter, the manner in which the credit union applies excess payments may come down to internal policies or even case law which may not be ideal as courts may interpret things differently yielding various results. If the credit union permits the due date to advance, here are some risk management principles to note.
There are several instances in which NCUA references paid ahead loans as part of a credit union’s overall risk management strategy. For instance, transaction risk is defined in NCUA’s Examiner’s Guide, Chapter 1 as follows:continue reading »