Bill Klewin, Architect of LOANLINER, Talks Lending, Compliance & What's Ahead

MADISON, Wis.—Bill Klewin is well-known to many in credit unions for leading the development of LOANLINER and as a frequent speaker to credit union conferences. Klewin is now retiring as lending products compliance leader, and shares his thoughts here as part of’s The Corner. Given the length of your career with CUNA Mutual, what strikes you most as you approach the last day on the job in contrast to what you encountered on your first day walking in the door?   

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Klewin: The sophistication of the issues and the complexity of the credit union business is the greatest change.   When I first started at CUNA Mutual, a large credit union was one greater than $10 million in assets.   That meant that the kinds of products and services offered by credit unions weren’t anywhere near as diverse, sophisticated, or complicated as they are now.   Few credit unions had first mortgage programs, and only a brave few had home equity lines of credit.   Share drafts were relatively new products and still controversial in some leaders’ opinions.   Most credit unions had only one or two branches and dealt with walk-in traffic, the phone, and the U.S. Postal Service as means of communications.   

From a consumer regulatory compliance standpoint, while the credit unions were subject to the rules, compliance was viewed in many circles as a nuisance.   I remember one specific situation where a board actually voted that they didn’t need to comply with consumer regulations as they were “not necessary” to protect their members. You have held a number of roles while at CUNA Mutual, including some time in the Office of General Counsel. Can you speak to the issue of some of the risks or vulnerabilities that you have seen?

Klewin: In credit unions, the biggest risk I see involves fair lending issues, both from the Equal Credit Opportunity Act and the Fair Housing Act.  The ramifications of even an allegation of violations of fair lending laws can be existential.  While the rules are slightly different, their purpose is similar.  Their purpose is to promote the availability of credit by prohibiting discrimination in lending based on certain characteristics, such as race, gender, or marital status.  Imagine the headline in your local paper- “The ABC Credit Union has been accused of discriminating against their members in their lending programs on a prohibited basis.”   A credit union may not be able to survive such an allegation, let alone a determination it actually did discriminate on a prohibited basis.) 

I discuss the “disparate impact” test below and difficulties it creates in compliance.  Unfortunately, you don’t need to go so far as a “disparate impact” test case to find real problems in credit unions in fair lending.  For example, I am always concerned about and have written and taught extensively what I refer to as “happy talk” from credit union staff. 

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   “Happy talk” is the non-business related talk staff engages in with potential borrowers.   It may appear as innocuous as a question about when two borrowers are getting married or when a pregnant woman is expecting her baby.  Seems like chit-chat, but when that chit-chat is coupled with a denial of a loan, it can take on much more sinister overtones.   Imagine being sued for discrimination in denial of a loan based on child-bearing (a prohibited basis) and having your loan officer asked on the witness stand whether they asked the borrower about her baby.   The loan officer will have to testify he did ask the question, but it had nothing to do with the loan decision.   Even if the jury decides it wasn’t used in determining the woman’s creditworthiness, the taint on the credit union’s reputation and the risk of future liability remains.  

These kinds of small interactions could have outsized ramifications, even to the continuing existence of the credit union.    Fair lending, from a compliance standpoint, is THE “keep-me-awake-at-night” risk.   A credit union can’t quantify it very well, and it can’t totally mitigate the risk at all.   It’s a Sword of Damocles over their head. You have spent a considerable amount of time in credit union lending. How has that evolved from both the CU standpoint and the solutions that CUNA Mutual has sought to provide?  

Klewin: The biggest change has been the level of sophistication a credit union lender must have about so many issues in being a successful lender. In the past, a lender had a limited number of products available and a limited number of distribution channels for her products. 

For example, a lender back then may only have made auto secured loans and personal loans out of one branch office.   In that case, she could focus on minutiae of underwriting and, if a loan was granted, completing the paperwork appropriately.  

As an aside, I saw many loan and deposit documents that were completed by hand, and used rate charts in determining the numerical disclosures.   For those who don’t remember, a rate chart was a pre-calculated chart that showed the loan officer what payments should be, given certain interest rate and loan term assumptions.  After a factor was found, simple math was used to calculate the remainder of the disclosures.  Needless to say, there were many errors in such a manual approach.   It led to what I referred to as the “Friday afternoon-Monday morning syndrome.”   There was a demonstrable uptick in errors on Friday afternoons due to higher volume and on Monday morning due to, well, it being Monday morning. 

CUNA Mutual, from the very beginning of the technology revolution made solutions available as I note below.  In the case of loan calculations, CUNA Mutual began with a device called “Loan Star” to help with these calculations and continues today to support a calculation engine used in many data processing systems.  Now, a lender has a full array of products, credit cards, home equity lines of credit, first mortgages, business loans, heck, loans secured by ocean-going boats; you name it, likely a credit union lender needs to consider almost any type of loan.  Additionally, those loans can come from multiple branches in multiple states, through the internet, the phone, mobile devices.  

The breadth, depth, and complexity of a lender’s job are the greatest challenges.  CUNA Mutual has responded over the years with products and services to help credit unions with the lender’s challenge, including LOANLINER documents for almost any credit union lending need,, Smart Phone Loans, the Lender Development Program, and Loan Generation Marketing.  I’m proud that our products help thousands of credit unions meet their members’ needs. What have you found to be some of the lessons learned and best practices observed when it comes to the lending process? Are there certain places where some credit unions get tripped up?

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Klewin: When staff stops viewing their members as individuals, I see processes overtake basic good sense and mistakes made.  While technology is great and can automate the underwriting process to some degree, a credit union lender can never go wrong taking a second look at a file, understanding a person’s individual situation, and taking a chance on a member, if warranted. Why are some credit unions such effective lenders, and other not so much (setting aside certain field of membership-related factors)?  How often do you/CUNA Mutual hear from credit unions seeking to be better lenders and, again, any commonalities there?   

Klewin: I can’t speak for all of CUNA Mutual, but I can say what I have observed.  There are two somewhat contradictory themes I see at work in great lenders:

A)   Great lenders are flexible.   They adapt to changing conditions in products, services, distribution channels.  They listen and respond to ideas from all staff, especially younger staff members who may be closer to trends affecting preferences and needs of prime borrowing members.

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B)   Great lenders follow guiding principles (“we make prudent loans”), create strategies around those principles, and follow those strategies, even if it is painful in the short term to do so.   I have seen too many lenders react to others’ strategies to the detriment of the credit union.  For example, I see credit unions getting into certain programs (business lending is an example) because other credit unions have done so without weighing whether such a program is consistent with the guiding principles of the credit union.  Another tactical example is credit unions with “rate matching” programs.   That isn’t following your strategy, that’s reacting to someone else’s strategy.  If you created products and priced them appropriately and then lower your rate to match another lender’s rate, you have given up your strategy for no gain. LOANLINER is one of those products that is critical, but also an invisible backbone to lending: how has that product evolved, and how will it evolve?

Klewin: LOANLINER is my baby.  I spent at least half my working life at CUNA Mutual involved in LOANLINER, either as product leader, counsel, or compliance leader.   I met my wife because she worked with LOANLINER, too.  Imagine our fascinating dinner conversations about Truth-in-Lending and Reg Z!

When I joined CUNA Mutual, LOANLINER was almost exclusively consumer lending forms.   Over the years, it has grown to include a full suite of documents and disclosures for almost any credit union need, whether for lending or deposit transactions.   In addition, LOANLINER has been a strong presence in credit unions from an education and training standpoint.  We have taught innumerable lenders and compliance staff over the years on many different subjects.  I visited almost every state working with leagues, CUNA, and individual credit unions on lending, operations, and compliance matters.  

Finally, we have been strong advocates for credit unions on various compliance issues.  For example, we fought long and hard to maintain multi-featured open-end lending for credit unions.  While in the end, we didn’t get the result we hoped for, it was right for us to lead the charge in attempting to set standards for multi-featured open-end lending.  I’m pleased to say there are still some credit unions using the multi-featured open-end lending approach for their consumer lending programs. We’ve saved everyone’s favorite topic for last: compliance. The subject is broad, and credit unions look to third parties such as CUNA Mutual for some (a lot) of guidance. But how do you/CUNA Mutual get your arms around all of the various compliance rules?   

Klewin: I think of compliance as answering two questions in getting our arms around compliance changes:

  1. How will these rules affect a credit union’s operations?
  2. How can CUNA Mutual provide practical, easily implemented education and solutions for credit unions in response to the rules?

If you look at the practical effects of a compliance change, the rules themselves are much easier to understand and implement.  

For example, the TILA/RESPA integrated disclosure rule has two big parts to it. 

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First, it requires new disclosures; and second, it requires credit unions to change their processes and timing in making those disclosures.  If we approach the rules to determine the impacts on a credit union’s lending program, our solution becomes twofold.  First, we create the documents and teach the credit unions how to use them, and second, we make sure they know what processes they have to change.   We reduce the challenge and the anxiety of a big rule change to understandable and actionable steps.    We strive not to be first with what the rules say, but strive to be the best in saying what the rules mean, what steps a credit union has to take to comply, and why they have to take those steps. 

Don’t get me wrong, there is no way around reading the rules.  The last set of mortgage rules from CFPB were 1,888 pages long.  Our staff read every page and agonized over those rules for thousands of person-hours.  They read those pages with an eye to what does the rules mean for credit unions by way of training, data processing, documents, process, and member education.   They also read those pages with an eye to how LOANLINER and CUNA Mutual can help with those training, data processing, documents, process, and member education needs.  If you take that approach, the rules become less daunting and more meaningful for our staff and, ultimately, for the credit union staff we help. The word “compliance” seems almost automatically linked to the word “burden.” Are there any real, practical steps a credit union can take to lighten the burden?    

Klewin: Stop thinking of them as a burden.   If a credit union thinks of compliance as a service they provide to their members, the burden becomes a task that members want.  Do credit union staff think of their IT duties as a burden?   I think for most credit unions, no.  I assume many think of it as an opportunity to meet their members’ needs.   

Similarly, a credit union that embraces the idea that compliance is in the best interests of the member perhaps approaches compliance as an opportunity, not a burden.  That approach can be a guiding principle.    That said, it leads to a natural conclusion that time and resources are well spent on making sure those duties are met.

While I favor a centralized compliance function, I believe the chief indicator of a credit union lightening their compliance burden is that they take their responsibilities seriously and allocate sufficient resources to the task.   Just as IT became a core competency for credit unions, compliance needs to have a similar focus in credit unions.    Compliance becomes a process and not an event. Is it possible for small or even medium-size credit union to effectively manage all the compliance demands? 

Klewin: From my viewpoint, no.  The cost and duties of compliance are greater proportionally for small to medium credit unions than for the largest.  The rules are the same whether you are a $50-million credit union or a $2-billion credit union.  That means the relative cost and effort for compliance changes in smaller or medium size credit unions is much greater.   As such, it is likely small and medium size credit unions will not be able to effectively manage all compliance risks. What do you tell them?  

Klewin: Assess the risks and focus on the biggest risks.  Write them down and rank them.   For example, make sure you are complying with the anti-discrimination laws.   If you have a violation of those rules, it’s an existential threat.  If you violate some minutiae of Truth-in-Lending, not so much.   Now of course, I’m not suggesting credit union staff ignore Truth-in-Lending, just that they focus on the biggest risks first and foremost. If you could be the U.S. Compliance Czar, what would you eliminate as compliance rules that are redundant or unnecessary?    

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Klewin: Certain different rules have similar goals, but slightly different processes.  For example, the Equal Credit Opportunity Act requires collection of certain demographic information, such as race and gender, for mortgage transactions.   Almost all transactions covered by that rule also require collection of that same data under the Home Mortgage Disclosure Act, but in a different format and with different end uses.  

CFPB would do a great deal of good by syncing up the collection responsibilities and goals.  CFPB was required to sync up disclosure rules for the most recent TILA/RESPA rules.  While that rule change is a short term pain, it will, in the long run, make disclosures for mortgage loans a lot easier to make and much more uniform for years to come.   Another example is mortgage licensing rules under the S.A.F.E. Act and under TILA.

Finally, I would bring clarity to the anti-discrimination rules under ECOA and the Fair Housing Act.  The executive branch has gone all in on the “disparate impact” test in determining whether a lending process is discriminatory.  The problem is a lender has no idea whether lending processes with have a “discriminatory impact” until long after loans are made that may fall afoul of the test.   In other words, there’s no safe harbor for compliance with the anti-discrimination rules.   It means a credit union may have no discriminatory intent, but still fall afoul of an allegation of discrimination.   This means there is never a definitive answer to management or regulators as to whether a credit union is in compliance with the law.    An answer of, “well, maybe, I’m not sure, I don’t know, it depends…” to the question “are we sure we’re not discriminating in our lending practices?” gives me no comfort.  

The Supreme Court is likely to hear a case on the “disparate impact” test in this term.   This may bring clarity to the issue.  Even if you advocate for the use of the “disparate impact” test in analyzing if a credit union is discriminating against their members, there needs to be rules for a credit union to be able to do testing before loans are made and not just after the fact.   It’s an unsustainable position without clear rules. What are your plans now, and will you remain active in credit unions in any way?    

Klewin: I plan on doing a little traveling with my family to begin with and my dream is to return to school and get my Master’s degree in history.   My undergrad degree was in history and, besides regulatory compliance, of course, is still my great love.   As for remaining active in credit unions, we shall see what the future brings.   My daughter is a junior at the University of Wisconsin-Madison (third generation Badger and a huge basketball fan).   Perhaps she will get involved in credit unions when she graduates.  I would applaud that development if it happens.  

I still strongly believe in the credit union movement and its mission and am proud to have contributed to credit unions’ success in some small way.   I will miss my friends and colleagues.

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