Military Lending Basics

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1 Military Lending Basics ABA Business Law Section Meeting Consumer Financial Services Committee Wednesday, April 15, 2015 Joseph J. Schuster Consumer Financial Services Group

2 The Servicemembers Civil Relief Act 50 U.S.C. App 501 et seq. The Servicemembers Civil Relief Act ( SCRA ) is the law that has evolved from similar laws enacted in the wake of the Civil War and World War I What has become the modern day SCRA was originally known as the Soldiers and Sailors Civil Relief Act The goal of the original Act (which is still true for today s SCRA) was to reduce issues that might arise at home for members of the military while fighting a war The Acts have aimed to address the problem that, in many situations, a servicemember s income while serving in the military will be less than his or her regular income The Acts have tried to reduce legal disadvantages to servicemembers as a result of their military service 2

3 The Servicemembers Civil Relief Act 50 U.S.C. App 501 et seq. Servicemembers akin to members of a protected class Applies directly beyond members of the armed forces - Some benefits also apply to spouses, dependents, and others Covered persons entitled to protections and benefits - Specified interest rates on mortgage loans during period of service and one year afterward - Protections and rights during period of service associated with contracts to buy or lease motor vehicles - No foreclosure without court order during period of service or for a period of time thereafter 3

4 The SCRA Oversight and Enforcement Consumer Financial Protection Bureau Office of Servicemember Affairs Implements policies/procedures for military borrowers and releases guidance to industry Solicits complaints and can refer them to state attorneys general - State Attorneys General - Complaints to the CFPB have prompted investigations - Department of Justice - SCRA violations are subject to DOJ enforcement - Private Right of Action 4

5 The Military Lending Act 10 U.S.C. 987 Active duty armed forces, Guard and Reserve, and dependents The MLA places restrictions on loans and lending - 36% annual interest rate cap ( Military Annual Percentage Rate ) - Loans may not be secured with personal check, bank account, title to a vehicle or a military allotment - No prepayment penalties - No rollovers, renewals, refinancing or consolidation unless terms are better - No mandatory arbitration clauses or other waivers of rights - Mandatory oral disclosures of MAPR, TILA disclosures, and payment obligations 5

6 The MLA Oversight and Enforcement Department of Defense originally defined application narrowly - Payday Loans: closed-end loans of up to $2,000 with terms of 91 days or less - Car Title Loans: closed-end loans with terms of 181 days or less - Tax Refund Anticipation Loans: closed-end loans in which tax refund goes to creditor as repayment - Mortgage and auto loans excluded from coverage Current rulemaking to redefine scope - Proposed rule to expand MLA s application CFPB enforces rules, and is focused on MLA violations - Penalties include fines, imprisonment, and voiding of contracts 6

7 Expansion of MLA Coverage DOD was directed by Congress to update the MLA regulations to cover problem areas identified in CFA report on the MLA Advanced notice of proposed rulemaking (ANPR) published in the Federal Register on June 17, 2013 Proposed rule published in the Federal Register on September 29, 2014 Proposed rule revises the definition of "consumer credit to cover the types of credit that are subject to the Truth in Lending Act except for credit specifically excluded by the MLA The proposed rule covers all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards 7

8 CFPB Exam Procedures Exam procedures are part of the short term, small-dollar lending procedures that were released back in September Procedures focus on payday loans, with examiners directed to look for rates that exceed 36%, improper rollovers, waiver of SCRA rights, and required repayment by allotment Specific directive to review loan files for evidence of a borrower s military status that would conflict with and override any self-certification ( Borrower Declaration ) to the contrary Possibility that MLA violation may also give rise to an alleged FCRA violation for inaccurate reporting or an FDCPA violation for seeking to collect excessive fees and charges 8

9 CFPB Exam Procedures (cont.) Examinations identified a lender that had allegedly made more than 335 loans at improper rates, apparently as a consequence of having inadvertently disabled its DOD data base check Lender had also allegedly made another 27 loans to protected military applicants where the DOD check came back positive after the loan had been funded Resulting CFPB enforcement action led to a settlement agreement that required the lender to refund about $33,500 Settlement agreement also required lender to adopt additional compliance mechanisms and to increase MLA training for all customer-service representatives 9

10 Practical Tips Compliance management systems should include MLA and SCRA compliance MLA and SCRA policies and procedures should detail compliance efforts Adequate staffing and adequate resources are critical staffing deficiencies are seen as unfair, deceptive and abusive practices Dedicated MLA and SCRA officers and/or a working group that meets regularly to assess compliance Use of the DoD website for checking military service is becoming akin to a requirement for compliance State military lending laws require constant monitoring 10

11 Resources CFPB Monitor Subscribe to our ABA award-winning blog at E-Alerts Subscribe at (click subscribe and indicate your areas of interest) Mortgage Banking Update Subscribe at (click subscribe and choose Mortgage Banking as your area of interest) Questions? 11

12 Consumer Financial Services Committee 2015 Spring Meeting San Francisco, California Beer & Basics: CFPB Regulation of Attorneys Anastasia Caton Associate Attorney, Hudson Cook, LLP

13 Overview 1. Background: Attorneys as Debt Collectors 2. Regulation of Attorneys Under the FDCPA 3. Regulation of Attorneys Under the Dodd-Frank Act 4. CFPB Regulation of Attorneys and Hanna

14 Background: Attorneys as Debt Collectors What do debt collection attorneys do? Send dunning letters File lawsuits to collect Initiate foreclosure and repossession proceedings Enforce judgments Pursue deficiencies Who regulates attorney conduct? State Supreme Courts State Bars Post-Dodd-Frank: CFPB

15 Regulation of Attorneys Under the FDCPA Debt collector means any person who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

16 Regulation of Attorneys Under the FDCPA 1977: Congress enacts FDCPA. Attorneys fully exempt, even if acting as debt collectors. 1986: Congress amends FDCPA to remove attorney exemption. 1995: U.S. Supreme Court holds that FDCPA applies to lawyer regularly engaged in debt collection on behalf of creditor client. Heintz v. Jenkins, 514 U.S. 291.

17 Regulation of Attorneys Under the FDCPA: Heintz v. Jenkins Issue: Facts: Holding: Whether the term debt collector in the FDCPA applies to a lawyer who regularly, through litigation, tries to collect consumer debts. Involved an allegedly misleading dunning letter, not litigation The FDCPA applies to attorneys who regularly engage in consumer-debt-collection activity, even when that activity consists of litigation.

18 Regulation of Attorneys Under the Dodd-Frank Act CFPB may not exercise enforcement or supervisory authority over: an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice law.

19 Regulation of Attorneys Under the Dodd-Frank Act Exceptions to Rule Against Attorney Regulation: Enumerated Consumer Laws [The limitation on attorney regulation] shall not be construed so as to limit the authority of the Bureau with respect to any attorney, to the extent that such attorney is otherwise subject to any of the enumerated consumer laws or the authorities transferred under subtitle F or H. The FDCPA is an enumerated consumer law.

20 Regulation of Attorneys Under the Dodd-Frank Act Exceptions to Rule Against Attorney Regulation: Rule of Construction CFPB can exercise enforcement, supervisory, any other authority over an attorney regarding the offering/provision of a consumer financial product or service (which includes debt collection) if: (A) The attorney is not engaged in the practice of law in connection with the consumer financial product or service; or CFPB v. Gordon, et al. (B) The attorney offers or provides the product or service but does not represent the consumer in connection with the consumer financial product or service. Larger Participant Rule for debt collection

21 CFPB Regulation of Attorneys and Hanna CFPB v. Hanna (N.D. Ga. July 14, 2014) Alleged Facts: Firm was a debt collection law firm operating like an assembly line (sued 84K consumers in 2009) Non-attorney support staff and automated computer programs did bulk of work, including deciding which consumers to sue Debt buyers failed to provide firm with key supporting documents (i.e., original contracts) Attorneys gave cursory review, signed off on non-attorney work Usually resulted in default judgments; when consumers did respond, attorneys dismissed lawsuits Attorneys filed unsubstantiated, unverified affidavits

22 CFPB Regulation of Attorneys and Hanna CFPB v. Hanna (N.D. Ga. July 14, 2014) Alleged Violations Violations of FDCPA Lack of meaningful attorney involvement (1) False representation that suit was from an attorney (2) False representation/deceptive means to collect Affidavits (1) False representation of character, amount, legal status of debt (2) False representation/deceptive means to collect (3) Unfair/unconscionable means to collect UDAAPs (1) Deceptive act/practice (2) Violation of FDCPA (1) Deceptive act/practice (2) Violation of FDCPA

23 CFPB Regulation of Attorneys and Hanna CFPB v. Hanna (N.D. Ga. July 14, 2014) Hanna s Motion to Dismiss (September 12, 2014): Practice of law exclusion in DFA precludes CFPB s UDAAP claims CFPB failed to state a claim under FDCPA, for UDAAPs Suit violates 1 st Amendment, Equal Protection 1 st Amendment: Right to petition courts Equal Protection: Imposes requirements only on certain types of litigants

24 CFPB Regulation of Attorneys and Hanna CFPB v. Hanna (N.D. Ga. July 14, 2014) Recent Actions: October 3, 2014: CFPB filed response to Hanna s motion to dismiss UDAAP claims exempt from practice of law exception (DFA rule of construction) Defer to CFPB s interpretation of DFA rule of construction in Larger Participant Rule October 24, 2014: Hanna filed reply to CFPB s response

25 Questions? Contact Information: Anastasia V. Caton Hudson Cook, LLP Hanover, MD

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