DOD Increases Military Loan Protections
Consumer lending is about to get even more complicated for all credit unions, especially for those of you who provide loans to members of the military, their spouses and dependents.
Yesterday, President Obama announced a final rule expanding the protections afforded to military personnel getting consumer loans. The rule means that most military consumer loans, including credit cards, will eventually be subject to a Military Annual Percentage Rate cap of 36%. All of you should review this regulation. Credit unions are not exempt. It’s time to call your vendor and get ready to groan as you are taught about these mandates at an upcoming compliance conference.
First some context. In 2007, responding to reports of predatory lending and payday loan practices around military bases, Congress passed the Limitations on Terms of Consumer Credit Extended to Service Members and Dependents,” Act (10 USC 987). The Act gave the DOD discretion in deciding which loans would be subject to greater protections. It ultimately made payday loans, vehicle title loans, and refund anticipation loans subject to a special Military Annual Percentage Rate (MAPR) of 36%.
Consumer advocates argued that these regulations were both too narrow and too easy to circumvent. For example, payday loans of 92 days or $2,001 could be issued with impunity. To close this loophole, the DOD proposed regulations making virtually all consumer loans to members of the military and their dependents subject to the 36% MAPR and enhanced disclosure requirements. Lenders would have to consult a database to determine who was entitled to these protections.
At the time, I argued that this was a well-intended but hopelessly misguided proposal. The compliance burden of a new APR formula would discourage credit unions from making good loans. I was not alone in my concerns. NCUA issued a statement pointing out that credit unions would not be allowed to offer Payday Alternatives sanctioned by the NCUA. In fact, about the only regulator that had anything nice to say about the proposal was the CFPB. Need I say more.
Here are some of the highlights:
- Federal credit unions are authorized to offer PAL loans with a maximum interest rate of 28%. The final rule does not exempt PAL loans from the MAPR cap. Instead credit unions providing these loans to military personnel will be authorized to exclude the application fee when calculating the MAPR. This addresses NCUA’s concern that the 36% MAPR cap is so restrictive that credit unions could not legally offer these payday loan alternatives to the military. It doesn’t address the larger issue about the increased compliance burden.
- The proposal expanded the MAPR cap to credit cards. In the preamble to the final rule the DOD “recognizes that imposing the interest-rate limit of 10 U.S.C. 987(b) on credit card products likely would result in dramatic changes to the terms, conditions, and availability of those products to Service members and their families.” Its solution is to exempt credit card loans from the MAPR until October 2017. After that, credit cards will receive a qualified exemption for fees that are both “bona fide” and “reasonable.”
- The proposed regulations required lenders to consult a nationwide database when making consumer loans in order to determine if someone is entitled to these protections: The final rule allows creditors to “unilaterally assess the status of a consumer ” by either using the MLA Database or a consumer report obtained from a nationwide consumer reporting agency. The preamble states that “Under either mechanism, a creditor must timely create and thereafter maintain a record of the information so obtained.“
The regulation is effective October 1, 2015 with. compliance required by October 3, 2016. Credit cards are not subject to its provisions until October 3, 2017 with the Secretary of Defense authorized to push compliance out another year.
There is much more to talk about but hopefully I scared you enough to review the regulation.
Here are links for more information from the DOD and a previous blog:
Flood Insurance Escrow Requirements Clarified
Yesterday, federal regulators, including the NCUA, announced final regulations clarifying escrow and force-placed insurance requirements under the Biggert-Waters Reform Act of 2012 and its subsequent amendments in 2014. Most importantly, a credit union with less than $1 billion in assets will not be required to escrow flood insurance premiums and fees if, as of July 6, 2012, it was not required by applicable federal or state law to escrow taxes or insurance for the term of the loan and did not have a policy requiring escrow of taxes and insurance. The escrow requirement applies to insurance made, increased, renewed or extended starting January 1, 2016.