ABA Staff Analysis: Military Lending Act Final Regulation Updated August 5, 2015

Transcription

1 ABA Staff Analysis: Military Lending Act Final Regulatin Updated August 5, 2015 The Department f Defense (DOD) n July 22, 2015 published final amendments t the Military Lending Act (MLA) regulatin, which restricts the terms n certain cnsumer lans made t military persnnel and their spuses and dependents. The final regulatin significantly expands its applicatin t include all cnsumer credit except fr residential mrtgages and purchase mney lans. All banks, at a minimum, will have t determine the military status f applicants fr cvered lans and prvide certain disclsures. Specifically, the final rule: Cvers cnsumer lans as defined in Regulatin Z except fr residential mrtgages and purchase mney lans such as car purchase lans. Limits what banks may charge in fees and interest n certain cnsumer lans by impsing a 36% military APR cap. The 36% cap is nt a 36% interest rate cap nr a 36% APR cap, but an MAPR cap that is an all-in APR that includes ther fees such as applicatin fees and annual fees that are nt finance charges under Regulatin Z. Impses disclsures which must be prvided t military persnnel and their spuses and their dependents when they btain a lan. Prhibits enfrcement f arbitratin agreements. Prhibits certain terms, prvisins, including: Waivers f the right t legal recurse under any state r federal law; Impsitin f nerus legal ntice prvisins ; Demands f unreasnable ntice frm the cvered brrwer as a cnditin fr legal actin ; and Use f a check r ther methd f access t a bank accunt which may prhibit liquid secured credit. Banks are respnsible fr determining an applicant s military status. As a practical matter, this means banks must inquire directly r indirectly with the DOD s database r t a natinwide cnsumer reprting agency that prvides such infrmatin, if such agency exists. While issues and risks remain, the final rule addressed many f the issues ABA raised. Fr example, the prpsal wuld have required banks t access the unreliable DOD database t determine military status, ptentially multiple times fr a single applicatin. The final rule allws natinwide cnsumer reprting agencies as an alternative surce, t the degree the infrmatin is available thrugh credit reprts. In additin, it allws mre flexibility s that in many cases a single inquiry abut military status 1

2 will be sufficient in rder t take advantage f the safe harbr. The prvisin making the safe harbr unavailable if the bank had actual knwledge f the applicant s status has been remved. The final rule als shrtened the ral disclsures and allws them t be prvided thrugh a tll-free number, rather than nly in persn. Mandatry Cmpliance date Cmpliance is required by Octber 3, 2016 except fr credit cards, the date is Octber 3, The Secretary f Defense has the discretin t extend the mandatry cmpliance date fr credit cards an additinal year t Octber, What credit is cvered? The final regulatin defines cnsumer credit t mean credit ffered r extended primarily fr persnal family, r husehld purpse and that is subject t a finance charge r is payable by written agreement in mre than fur installments. Thugh the DOD stresses that the definitin is cnsistent with the Truth in Lending Act (TILA) definitin, the MLA definitin includes imprtant exclusins. Specifically, the MLA definitin excludes residential mrtgages and purchase mney lans such as car purchase lans. Overdraft lines f credit, and mst if nt all depsit advance prducts are cvered. Overdrafts (e.g. verdraft prtectin services) are nt cvered Wh is a cvered brrwer? Under 232.3(g), a cvered brrwer is a cnsumer wh at the time the cnsumer becmes bligated n a cnsumer credit transactin r establishes an accunt fr cnsumer credit, is a cvered member r dependent. A cvered member is a member f the armed frces serving n active duty r active guard and reserve duty r a dependent, which includes spuses f a member f the armed services. It des nt include accunts that were established prir t a custmer serving n active duty. 2 It als des nt include a custmer wh was a cvered brrwer at the time the accunt was established but is n lnger a cvered brrwer. 3. The regulatin prhibits prviding a cnsumer lan with an MAPR that exceeds 36%. Hw is the MAPR different frm the APR under Regulatin Z? The MAPR is different frm the TILA (Regulatin Z) APR definitin because the calculatin includes fees that are nt cnsidered finance charges under Regulatin Z, such as applicatin and participatin fees, such as annual fees. The MAPR calculatin als includes fees and premiums fr credit insurance, debt cancellatin, and debt suspensin, fees fr a credit-related ancillary prduct sld in cnnectin with the credit transactin fr clsed-end and credit r an accunt fr pen-end credit. The prpsal had nly included such ancillary fees sld nly in cnnectin with and either at r befre cnsummatin f the credit transactin. The final rule includes in the MAPR calculatin the fee fr any ancillary prduct sld with an extensin f credit t a cvered brrwer s lng as that ancillary prduct is assciated with an extensin f credit which culd arise at any time in an nging pen accunt fr 1 32 CFR 232.3(f). 2 Id. at 232.2(a). 2

3 cnsumer credit. Certain bna fide fees may be excluded in the case f credit cards as are certain applicatin fees fr small amunt lans as defined in the regulatin. 3 Fr pen-end credit, the DOD has re-intrduced the effective r histric APR cncept. In effect, this requires a retractive calculatin f the APR, based n the custmer s actual balance and actual fees impsed during the billing perid. Fr the reasns the Federal Reserve Bard s abandned this calculatin, the effective APR aspect f the MAPR calculatin culd cause even small, mdest fees t exceed the 36% MAPR significantly. T illustrate, a $20 annual fee r a $5 cash advance fee n a credit card with a 12% interest rate culd easily exceed the 36% MAPR depending n the custmer s balance and the date f transactin and payment. The DOD states that a creditr reasnably culd be expected t estimate at the utset f a billing cycle whether charges t a cvered brrwer can prduce an APR in excess f the limit particularly because the creditr already wuld knw the peridic rate and whether the nn-peridic fees are cvered by the exclusin fr a bna fide fee 4 This statement seems t verlk the fact that key factrs in the calculatin, including the balance and payments and the timing f new transactins and payment cannt be knwn at the utset f a billing cycle. The DOD then als ntes that in the event a creditr cannt make the calculatin at the utset f the billing cycle, it culd calculate the ttal charges that [are] included in the MAPR and waive an amunt necessary t cmply with the 36 percent limit 5 4. Des the exclusin frm the MAPR calculatin f bna fide fees apply t verdraft lines f credit and ther pen-end credit prducts? N. The exclusin is nly available t credit card prducts. 5. Hw des a bank calculate the MAPR f an pen-end accunt if an annual r participatin fee is impsed during a billing cycle, but there is n balance fr that billing cycle? If an MAPR cannt be calculated because there is n balance, the creditr may nt impse any fee r charge during that billing perid except fr a participatin fee r annual fee that is $100 r less. The $100 limit des nt apply if the participatin fee is bna fide as prvided in 232(d). 6 In ther wrds, if it is a bna fide annual fee, it may be excluded frm the MAPR calculatin. 6. What are the bna fide fees excluded frm the MAPR calculatin fr credit cards? The final regulatin allws certain fees impsed n credit card accunts t be excluded frm the calculatin if they are bna fide as well as reasnable fr that type f fee. 7 The regulatin ffers a safe harbr fr purpses f determining whether a fee is reasnable (but nt necessarily bna fide). While the final rule is an imprvement ver the prpsed exclusin fr bna fide fees that were reasnable and custmary, determining whether a fee is bna fide and reasnable, even with the safe harbr is subjective, susceptible t challenge, and risky. 3 Id. at 232.3(p) and 4(c) FR (July 22, 2015). 5 Id CFR 232(d). 7 Id. at 232.4(d). 3

4 Bna fide is nt defined, thugh the regulatin prvides standards t assess whether a bna fide fee is reasnable. The standard includes cmparing fees typically impsed by ther creditrs fr the same r a substantially similar prduct r service like-kind fees and ffers the example f a cash advance fee. Substantially similar prduct is nt defined. The Supplementary Infrmatin attempts t explain hw t cmpare mre cmplicated but cmmn credit card prgrams, such as rewards cards, given that fr such prgrams, higher annual fees may be impsed in exchange fr additinal services and waivers f ther fees. A smewhat simplistic explanatin ffers little practical directin ther than the creditr is permitted t assess the reasnableness f a participatin fee by taking int accunt the ptential value f any rewards pints that may be awarded t a cvered brrw. 8 Under the safe harbr, a bna fide fee is reasnable if the fee is less than r equal t an average amunt f a fee fr the same r a substantially similar prduct r service charged by 5 r mre creditrs with at least $3 billin in an utstanding U.S. credit card balances during the last 3 years. 9 A fee that is higher than an average amunt calculated under this sectin may still be reasnable, depending n ther factrs related t the credit card accunt. In additin, the fact that n ther creditrs charge a fee fr the same r substantially similar prduct des nt per se mean it is nt reasnable. 10 Ptential issues with using the safe harbr include determining what a substantially similar prduct r service is, given the variatins in the credit card market, and where card issuers might btain all the fees f cmpetitrs. The Supplementary Infrmatin suggests that the infrmatin can be btained frm the cmplete cntract terms n issuers websites r frm the Bureau s website, thugh a recent review f card issuers and Bureau s website shws that nly ranges f interest rates and fees may be prvided. 11 The regulatin recgnizes that participatin fees might vary depending n whether ther fees are charged. Accrdingly, it prvides that a participatin fee may be reasnable if the amunt reasnably crrespnds t the credit limit in effect r credit made available when the fee is impsed, t the services ffered under the credit card accunt r t ther factrs relating t the credit card accunt If sme charges are bna fide but thers are nt, may the credit card issuer still exclude the bna fide fee frm the MAPR calculatin? N. If any fee is nt a bna fide fee, all fees (including bna fide fees) must be included in the MAPR calculatin FR (July 22, 2015) CFR 232.4(d)(3)(ii). 10 Id. 11 The Bureau is currently upgrading its system fr cllecting infrmatin frm credit card issuers, which may add greater detail and accunt specificity CFR 232.4(d)(3)(iv) CFR 232.4(d)(4)(ii). 4

5 8. Are there any special cnsideratins fr calculating the MAPR fr small dllar lans? Yes, but they are very limited. Sme applicatin fees may be excluded frm the MAPR calculatin fr shrt-term small amunt lans prvided that the applicatin fee is nt charged mre than nce in a rlling 12-mnth perid Hw are shrt term small amunt lans defined? The exceptin fr excluding the applicatin fee frm the MAPR calculatin nly applies t clsed-end lans that are: Subject t a federal law that expressly limits the rate f interest that an insured depsitry institutin r federal credit unin may charge and which limitatin is cmparable t a limitatin f an APR f 36 percent; Made in accrdance with the requirements f the federal regulatry agency that implements the federal law s lng as that law: Cntains a fixed numerical limit n the maximum maturity term which cannt exceed 9 mnths; and Limits the amunt f any applicatin fee. 15 Included in this exclusin are certain Payday Alternative Lans ffered by credit unins pursuant t the Natinal Credit Unin Administratin rules that limits the APR and applicatin fee that may be charged. There is n bank prduct subject t similar federal law (which includes a regulatin) at this time. 10. Beynd the MAPR 36% cap, what are the ther restrictins n the terms f cvered lans and what d they mean? There are a number f additinal restrictins n cvered lans made t service members and their spuses and dependents thugh banks are excluded frm tw f them. Many f the terms are undefined, vague, cnfusing, and subjective. Prhibitins applicable t banks include: Requirements t submit t arbitratin r ther nerus legal ntice prvisins in the case f a dispute 16 r demands f unreasnable ntice frm the cvered brrwer as a cnditin fr legal actin. 17 While arbitratin may be well-understd, the meaning f the ther terms are nt. These prvisins are undefined and the regulatin ffers n examples. Nr is it clear the difference between an nerus legal ntice and an unreasnable ntice. The DOD, when it 14 Id. at 232.4(c)(2). 15 Id. at 232.3(t). 16 Id. at 232.8(c). 17 Id. at 232.8(d). 5

6 adpted the regulatin in 2007, indicated that their meaning wuld be determined n a caseby-case basis. 18 Waivers f the right t legal recurse under any state r federal law including any prvisin f the Servicemembers Civil Relief Act. 19 The final regulatin des nt define the right t legal recurse nr des it prvide examples, althugh ftnte 183 in the Supplementary Infrmatin explains that nthing in the regulatin affects the federal law gverning the interest rate a financial institutin may charge. 20 It is nt clear whether and hw this prvisin might impact standard prvisins in cnsumer credit frms under which the cnsumer explicitly r implicitly waives rights t legal recurse. These include, fr example, cnflict f law waivers. Use f a check r ther methd f access t a bank accunt. 21 This prhibitin appears t target payday-like practices f ensuring payment by btaining an advance check frm the cnsumer at the time f the lan, t be prcessed when the lan becmes due. Exceptins t this restrictin allw lenders: T require an electrnic fund transfer t repay the cnsumer credit transactin if permitted by law; T require direct depsit f the cnsumer s salary as a cnditin f eligibility fr cvered credit r t debit autmatically the checking accunt; r T take a security interest in funds depsited after the extensin f credit in an accunt established in cnnectin with the cnsumer credit transactin. The last prvisin raises cncerns that the regulatin prhibits lenders frm ffering service members and their spuses and dependents access t liquid secured credit, that is, credit (such as credit card credit) that is secured by a financial accunt such as a savings accunt. Such accunts are ften used as a way t build r rebuild credit. Hwever, the security interest in these prducts is taken at the time the accunt is established, nt after the accunt is established as the exceptin prvides. Requirement as a cnditin f cnsumer credit that the brrwer establish an alltment t repay the lan. 22 Prepayment penalties FR (August 31, 2007) CFR 232.8(b) FR (July 22, 2015) CFR 232.8(e). 22 Id. at 232.8(g). 23 Id. at 232.8(h). 6

7 11. What are the ther restrictins n cvered lans made t service members and their spuses and dependents that d NOT apply t banks? A prhibitin against refinancing r renewing cvered credit by the same creditr with the prceeds f ther cnsumer credit extended by that creditr t the same cvered brrwer. 24 A prhibitin against using the title f a vehicle as security fr a cvered lan What disclsures must cvered brrwers receive? Statement f the MAPR. 26 Banks may cmply with this prvisin by describing the charges the creditr may impse related t the cnsumer credit t calculate the MAPR. 27 Sectin 232.6(c)(2) prvides a mdel statement. Lenders are nt required t disclse the numerical MAPR. 28 Any disclsures required by Regulatin Z. Clear descriptin f the payment bligatin f the cvered brrwer. 29 Fr clsed-end credit, a payment schedule suffices. Fr pen-end credit, the accunt pening disclsures required under Regulatin Z suffice. The prpsal had required disclsure f additinal infrmatin describing prtectins and financial resurces available t service members and their spuses and dependents. That disclsure was eliminated. 13. Hw must the disclsures be prvided? The disclsures must be prvided in writing. 30 The statement f the MAPR and the payment bligatin descriptin must als be prvided rally. 31 Oral disclsures may be made thrugh a tll-free number. 32 The prpsal required ral disclsures t be prvided in persn, with limited exceptins. Hwever, the final rule permits the infrmatin that must be prvided rally t be made in persn r thrugh a tll- 24 Id. at 232.8(a). 25 Id. at 232.8(f). 26 Id. at 232.6(a)(1). 27 Id. 28 Id. 29 Id. at 232.6(a)(3). 30 Id. at 232.6(d)(1). 31 Id. at 232.6(d)(2). 32 Id. at 232.6(d)(2(ii)(B) (July 22, 2015). 7

8 free number. 33 The tll-free number must be prvided n (1) the applicatin frm r (2) with the written disclsures described abve. The prpsal required that the disclsures be clearly and cnspicuus. Hwever the final regulatin mits this requirement. 14. When must the bank prvide the disclsures? Disclsures must be prvided befre r at the time the brrwer becmes bligated n the transactin r establishes an accunt fr the cnsumer credit Hw des a bank determine an applicant s military status? T ensure cmpliance, banks must determine military status f applicants by (1) assessing the DOD s database r (2) using a statement, cde r ther indicatr describing military status cntained in a cnsumer reprt frm ne f the natinwide cnsumer reprting agencies. They may nt rely n the applicant s declaratin. Currently, lenders may rely n the statements f applicants t determine applicants military status. Hwever, the DOD was cncerned abut service members r their dependents wh make false statements. 35 Accrdingly, it prpsed that lenders culd n lnger rely n the applicants declaratin f their military status. Rather, t ensure cmpliance, lenders wuld be required t rely n the regulatin s safe harbr, which entailed assessing the DOD s database. Hwever, there were significant cncerns that the safe harbr was unwrkable given the lack f reliability f the DOD database with regard t availability and accuracy when used fr Servicemember Civil Relief Act purpses. In additin, there were cncerns abut the ability f the DOD s database t handle the expected significant increase in the vlume f inquiries that wuld result due t the expanded applicatin f the MLA regulatin. The final regulatin ffers sme ptential relief because btaining military status infrmatin frm credit reprts is ptentially cnvenient and efficient. Hwever, there remain cncerns abut the reliability f the DOD database and, at this time, it des nt appear that any f the natinwide cnsumer reprting agencies prvide such infrmatin. They may d s by the mandatry cmpliance date f Octber 3, The prpsal wuld nt have allwed lenders t rely n the safe harbr if they had actual knwledge f an applicant s active military status. This wuld have entailed lenders reviewing all dcuments thrughut the rganizatin manually r creating a centralized database. Accrdingly, the prvisin was eliminated. 33 Id. at 232.6(d)(2). 34 Id. at 232.6(a) FR (July 22, 2015). 8

9 16. When must the bank determine an applicant s military status? The lender must determine military status at the time: An applicant initiates a transactin r 30 days prir t that time; An applicant applies t establish the accunt r 30 days prir t that time; r The creditr develps r prcesses a firm ffer f credit that includes the status f the cnsumer s lng as the cnsumer respnds t the ffer n later than 60 days after the creditr prvided the ffer. 36 ABA had raised cncerns that multiple inquiries t determine military status wuld be required, e.g., at a minimum at the time f applicatin and again when the lan was cnsummated. The 30-day perid streamlines cmpliance and will reduce the vlume f ptential inquiries int the DOD database by reducing the ptential fr multiple inquiries. Curiusly, 232.5(b)(2)(B) prhibits lenders, including an assignee, frm directly r indirectly btaining infrmatin frm any DOD database t ascertain whether a cnsumer had been a cvered brrwer as f the date f that transactin r as f the date that accunt was established. 17. What recrds must the lender retain t make use f the safe harbr? Lenders are nly entitled t the safe harbr if they timely create and thereafter maintain a recrd f the infrmatin btained. 37 A recrd culd include, fr example, a screen sht frm the DOD database r a cpy f the credit reprt. 18. What are the penalties fr vilatins? The penalties fr vilatins are unusually harsh and include criminal penalties. Criminal penalties: Creditrs knwingly vilating the regulatin are subject t fines and imprisnment fr up t ne year. Vidance f the cntract: Any agreement is vid frm inceptin f the cntract if any prvisin is vilated. Private right f actin and civil liability: A persn wh vilates the regulatin is liable t any actual damage, but nt less than $500 fr each vilatin, punitive damages, apprpriate equitable r declaratry relief, and any ther relief prvided by law. 38 Arbitratin: N agreement t arbitrate any dispute invlving the extensin f cvered cnsumer credit t a cvered brrwer is enfrceable against any cvered brrwer r any persn wh was a cvered brrwer when the agreement was made CFR 232.5(b)(3). 37 Id. 38 The MLA was amended in January 2013 t add a private right f actin in federal curt. 9

10 Csts f the actin: Thse fund t vilate the regulatin are liable fr the csts f the actin and reasnable attrney fees. Regulatin Z vilatin: A vilatin f Regulatin Z invlving any prduct cvered by the regulatin is als a vilatin f the MLA. Questins? Cntact ABA s Nessa Feddis and Rb Rwe fr mre infrmatin. 10