Employee Loan Discounts: What Credit Unions Need to Know

A question we get asked often in our compliance inbox is whether credit unions can offer loan discounts to their employees. The answer? Yes! But as with most things, there are some caveats to pay close attention to if your credit union is considering offering these types of incentives to its employees. 

The NCUA Rules and Regulations, section 701.21 , establishes the requirements that a federal credit union (FCU) must follow when providing loans. Under this provision, an FCU is prohibited from granting preferential loans to its officials, an immediate family member of an official, and an individual having a common ownership, investment or other pecuniary interest with an official or immediate family member. An official is defined as “any member of the board of directors, credit committee or supervisory committee.”  However, there is no prohibition against an FCU offering preferential loans to its employees. 

While there is no prohibition on preferential treatment, there are some things to pay attention to when structuring these types of programs. To start, when offering a discounted rate for an employee that will increase if the employee leaves the credit union requires some disclosures.

Closed-End Credit

For closed-end credit, Section 1026.18(f) of Regulation Z discusses the specific disclosures that are required before consummation when a variable rate may increase stating. The general rule is that if the annual percentage rate (APR) can increase after the loan is finalized, and the loan is either not secured by the borrower’s principal home or is secured by the principal home but lasts one year or less, the lender must disclose: 

• When and why the rate could go up 
• Any limits on how much it can increase 
• How an increase would affect the borrower 
• An example showing how payments could change if the rate rises 

For longer-term home-secured loans, if the APR can increase after closing and the loan is secured by the borrower’s primary home with a term longer than one year, the lender must disclose: 

• That the loan has a variable interest rate 
• That more detailed variable-rate information has already been provided earlier 

The lender may use certain other required disclosures (under sections 1026.18(f)(2) and 1026.19(b) )) instead of the disclosures listed in above.

Additionally, section 1026.19(b) , provides disclosure requirements for certain variable rate transactions. The commentary to the section provides the following example of a variable rate transaction:

“i. The following transactions, if they have a term greater than one year and are secured by the consumer's principal dwelling, constitute variable-rate transactions subject to the disclosure requirements of 1026.19(b)… 

… B. Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the creditor, and the note reflects the preferred rate. The disclosures under 1026.19(b)(1) and 1026.19(b)(2)(v), (viii), (ix), and (xii) are not applicable to such loans.” 

Therefore, an employee loan with a preferred rate that could increase if that employee leaves their employment at the credit union, could be considered a variable rate transaction if the loan is for a term greater than one year and it is secured by the consumer’s principal dwelling.

If a trigger event occurs, section 1026.20 provides post-consummation disclosure requirements for rate adjustments with a corresponding change in payment for an adjustable-rate mortgage.

Open-End Credit

Section 1026.9(c)(1) discusses subsequent disclosure requirements when written notice is required for changes in terms for open-end credit, specifically home-equity plans. Section 1026.9(c)(1)(i) provides that for home-equity plans covered by section 1026.40 , if any required loan term (as listed in 1026.6(a)) changes or the minimum required payment increases, the lender must provide written notice to every affected consumer. This notice must be sent or delivered at least 15 days before the change takes effect. However, if the consumer has already agreed to the change, the 15-day advance notice is not required—though the lender still must provide notice before the change becomes effective.

However, the commentary to paragraph 9(c)(1) discusses situations when no notice of a change in terms needs to be given stating:

“1. Changes initially disclosed .  No notice of a change in terms need be given if the specific change is set forth initially, such as: rate increases under a properly disclosed variable rate plan, a rate increase that occurs when an employee has been under a preferential rate agreement and terminates employment,   or an increase that occurs when the consumer has been under an agreement to maintain a certain balance in a savings account in order to keep a particular rate and the account balance falls below the specified minimum. The rules in 1026.40(f) relating to home-equity plans limit the ability of a creditor to change the terms of such plans.”  

Therefore, no change in terms notice is required when a rate increases on a variable rate plan as long as the preferential rate was properly disclosed in the original agreement.

While employee loan discounts are permissible, they are not without compliance considerations. Clear disclosures and thoughtful design are key to ensuring these benefits don’t create unintended regulatory risk.

If you have any questions concerning this topic, please contact the America’s Credit Union’s Compliance team at [email protected].

Please note, questions regarding tax implications should be discussed with the credit unions' tax professionals.