Posts tagged ‘MAPR’

How A Federal Interest Rate Cap Would Impact Your Credit Union

There is no statute which provides a better example of legislative mission creep than the Military Lending Act. It was originally passed in 2007 to cap the interest rates that could be charged to high cost payday loans, vehicle title loans, and refund anticipation loans involving members of the military and their family members.

In 2016 its regulations were extended to include most consumer loan products including credit cards. Crucially, these regulations were coupled with a new Military Annual Percentage Rate (MAPR) which capped interest rates on these loans at 36%.

Now, to the surprise of absolutely no one, Senator Sherodd Brown of Ohio is championing legislation which would extend the protections afforded by this legislation to the American public writ large by giving America a 36% MAPR interest rate. Earlier this week, the Senator used NCUA Chairman Todd Harper’s appearance before the Committee to underscore the fact that credit unions function just fine with a 36% cap and even have statutory authority to offer Payday Alternative Loans, albeit with a 28% interest rate.

As the debate unfolds, a few facts are being overlooked. Most importantly, the 36% MAPR is not the same (see appendix in link) as a 36% interest rate calculated under the Truth and Lending Act and regulation Z. For example, the MAPR includes credit insurance premiums and credit related ancillary products. In contrast, such charges are generally not considered finance charges under regulation Z provided certain conditions are met.

These and other differences may not result in dramatic calculation differences but if imposed across the board they would raise a new host of compliance requirements. The last thing we need is thousands of pages of additional consumer lending regulations.

I would love to live in a world where short term loans would not have to be provided. But the evidence is overwhelming that there is a pressing and real demand for these loans. After all, more than half of Americans don’t have savings to cover even moderately expensive financial surprises. To supporters of this legislation, this is evidence of why reasonable caps should be imposed so that desperate borrowers aren’t held up by legal loan sharks.

Conversely, it is awfully tough to make a profit on short-term small dollar loans, unless your business is specifically designed to do so, which is why a whole industry has sprouted up to meet this demand.  While it’s true that credit unions can provide short term loans, according to the preamble accompanying proposed changes to the PAL regulations in 2018, less than 45% of FCUs choose to do so. The reality is, that despite the demand for short term loans it is extremely difficult for financial institutions to cost effectively provide short term loans that are attractive to the people who need them.

Count me in the group of crusty cynics who believe that capping interest rates will simply make short term loans more difficult to get and result in a larger, underground economy.  This is yet another example of an appealingly simplistic solution to a highly complicated problem.

August 6, 2021 at 9:09 am Leave a comment

MLA guidance Clarified; Wild Card Power Requested

Good morning folks. Grab an extra strong cup of coffee before reading this blog. Yours truly has a busy morning but I wanted to give you a heads up on two esoteric but important compliance issues for credit unions. I will provide more detail at a future date.

Our national trade associations deserve a lot of credit this morning, now that the Department of Defense has decided to amend problematic guidance issues implementing the Military Lending Act (MLA). The Military Lending Act is federal legislation which extends credit protections to military personnel and their families. Most importantly, loans made to military personnel are subject to a unique Military Annual Percentage Rate capping interest on covered loans at 36% and requiring certain disclosures.

In 2015 the DOD extended the MLA’s protections to most closed end and open ended consumer loans. To put it nicely, the regulations which accompanied this change created a great deal of confusion. The DOD ultimately issued two sets of interpretive guidance to help lenders comply with the new regulations. The second guidance included a question and answer (Q&A No. 2) which raised concerns about the ability of credit unions to offer additional products with car loans most importantly, GAP insurance. By repealing Question No. 2 the DOD has eliminated this confusion.

New York’s Department of Financial Services has issued a detailed Wild Card request clarifying the ability of state chartered credit unions to engage in loan participations involving liquidating credit unions as well as loans from any source which are being purchased to facilitate the packaging of loans to be sold on the secondary market. The application clarifies that state charters can exercise the same powers that federal credit unions can, pursuant to 12 CFR § 701.21 provided they meet certain conditions.

On that note, have a good weekend.

February 28, 2020 at 9:16 am Leave a comment

The Military Lending Act May Apply To That Car Loan After All

Image result for north korean president

We have the greatest military in the world but judging by the way the DOD has gone about implementing the Military Lending Act it is safe to say that if the military was as bad at defending us as they are at promulgating consumer protection regulations, the United States would be a protectorate of a united Korea under the leadership of great leader Kim Jong-un.

If you think I’m being too tough then perhaps you haven’t been paying attention to the latest developments. The Military Lending Act was passed by Congress in 2007 in response to wide-spread reports of abusive loan practices towards our military personnel such as pay-day loans. The basic idea is that when consumer credit is extended to a member of the military or their relatives, they are to be given additional protections. Most importantly, the Military Lending Act mandates that covered products are subject to a Military APR (MAPR) which caps the amount of interest that can be charged at 36%. Since the original regulations applied to a narrow group of products, they didn’t get all that much attention.

But then in 2015 the Department of Defense extended the coverage of regulation to most consumer loan products and placed an affirmative obligation on institutions to identify covered individuals. This was bad but at least the final regulations did not apply to car loans. Unfortunately on December 14th, the DOD gave compliance people everywhere an early Christmas present when it issued an updated Q&A in which it explained that automobile purchases generally are not considered consumer credit for purposes of the Act, but “The answer will depend on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance. Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.”

In other words, if you have the audacity to offer GAP insurance to your military members you must comply with the Military Lending Act when making car loans. Try explaining that one to your software vendor.

Yesterday CUNA joined other associations in calling for the DOD to withdraw this ridiculous interpretation which contradicts the DOD’s earlier decision that car loans are not consumer credit products for purposes of the Military Lending Act. I wish I could give you more helpful advice than this but just remember that everyone is in the same boat.

DeFrancisco Runs For Governor

Quick witted, long serving Republican Senator John DeFrancisco announced on Tuesday that he would run for Governor against incumbent Andrew Cuomo. DeFrancisco joins Brian Kolb, the Republican minority leader in the Democrat-dominated Assembly, and Joel Giambra, the former Erie County executive. Here’s a good bit of trivia for you: When’s the last time a Republican won state-wide office in New York? 2002.

My Good As Gold Super Bowl Prediction

Well it’s that moment you’ve all been waiting for when I give you my Super Bowl prediction. My predictions are so good that you can actually use them as collateral under NCUA regulations. New England 27, the Eagles 14. Brady cements his legacy as the greatest quarterback of all time and after some early success, the Eagles are unable to move the ball against the Patriots. At least we can all watch bits and pieces of that ridiculous Tom Brady video.


February 2, 2018 at 8:55 am Leave a comment

Why I Hope This Blog Doesn’t Matter To You

I pride myself on getting up bright and early to provide you with informative rants on the news of the day that will impact your credit union, but today is different. I’m hoping that the information I give you is obsolete and unnecessary. Here it goes.

On October 3rd regulations extending the “Military Lending Act” (MLA) officially to credit card transactions took effect. This means that when providing credit cards to a member of the armed services or dependent, you may not charge a Military Annual Percentage Rate (MAPR) greater than 36%. In addition, there are unique disclosures that must be provided.

The most important thing to keep in mind is that the MAPR is calculated differently than the traditional APR. For example, in calculating the APR you would include any premium or fee for credit insurance or debt suspension agreement.

The good news is that the regulation permits lenders to exclude from the MAPR calculations. Bona fide and reasonable fees can be excluded from the MAPR calculation. A fee meets this criteria if it is similar to fees imposed by other creditors for “the same or substantially similar product or service.” If you don’t want to risk being challenged over whether a fee is in fact bona fide, a compliance “safe harbor” (see yesterday’s blog) is provided. A bona fide fee is reasonable “if the amount of the fee is less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by 5 or more creditors each of whose U.S. credit cards in force is at least $3 billion in an outstanding balance (or at least $3 billion in loans on U.S. credit card accounts initially extended by the creditor) at any time during the 3-year period preceding the time such average is computed.” This notice from CUNA Mutual provides guidance on how you can make that calculation.

When the MLA was first implemented, you could rely on information provided by your member to determine if they were entitled to the MAPR’s protection. But since October of last year, you only receive safe harbor protection for complying with the law’s requirements if you run a member’s identification information in the DMDC database. In addition, the major credit reporting agencies can also flag MLA eligibility.

Remember, this regulation simply expands on requirements that were already imposed on lenders as a result of the Department of Defense’s decision to expand the coverage of the Military Lending Act from just high cost pay-day loans, vehicle title loans and refund anticipation loans to virtually all types of consumer transactions.

When the DOD decided to expand the coverage of the MLA, about the only regulator who thought that the DOD’s updated regulatory framework made sense was the CFPB. Need I say more? Both the banking and credit union trade groups continue to express concern that the regulations, no matter how well-intentioned, needs to be better explained. In addition, it seems to me that, by basing bona fide fees on the practices of the largest credit card providers the regulations have the unintended consequence of making it more difficult for smaller lenders such as credit unions to cost effectively provide credit cards to military personnel and their dependents.

But the time for complaining is over. Besides, that’s my job. Unfortunately, I get the sense that there are some credit unions that aren’t quite up to speed when it comes to complying with this regulation. Be sure to take a nap when you get home today so you are nice and fresh for tonight’s Yankee game.

October 5, 2017 at 9:27 am Leave a comment

three Quick Notes For Tuesday

I’m about to leave for the Association’s Annual Legal & Compliance conference, at the Turning Stone Casino, but there are Three things I want to give you a  heads- up on.

First, NCUA Yesterday released a letter reminding credit unions that guidance was issued on August 26 intended to clarify questions surrounding Military Lending Act Regulations that take effect on October 3rd.  I would make fun of NCUA for coming out with guidance on guidance but your blogger must shamefully admit that he actually didn’t realize that this guidance was even issued in the closing days of summer.

The MLA regulations are a big deal. As I have explained in a previous blog, almost all consumer credit transactions subject to Regulation Z  involving military personnel and their dependents will now be subject to greatly enhanced consumer protections, including a Military APR  interest rate cap of 36%.  Since this APR is calculated differently than a traditional APR under Regulation Z,  this creates yet a new level of complexity when it comes to consumer lending.  You may not serve many members of the armed forces but remember  since  the regulation now  applies to so many different products all credit unions should put procedures in place for identifying members to whom this regulation applies.  Frankly, I  think the guidance creates as many questions as it answers but I will let  you hard-core compliance folks out there decide for yourselves.

Is This The Credit Card Of  The Future?

Everything I have read about millennials is that they are debt averse so take the time to read this intriguing article in the New York Times explaining why millennials are so interested in a new credit card being offered by J.P Morgan Chase with an annual fee of $450. Are they crazy?  Or just crazy like foxes?

You Have To Know When To Fold Em

Finally if you find yourself tempted by the Turning Stone’s poker tables tonight remember: Those who chase straights and flushes arrive on planes but leave on busses.

On that note, I hope to see you at the Turning Stone, if our paths cross please be sure to say hello! I will be back on Thursday.






September 13, 2016 at 8:31 am Leave a comment

Remember MLA Compliance Right Around the Corner

Wake up kids, the purpose of this blog is to remind you that summer is almost over and there is a ticking regulatory time bomb right around the corner.  The good news is that we expect further guidance on this regulation in the near future.

I am referring to regulations expanding the scope of the Military Lending Act.  When Congress first passed this Act, regulators decided to clamp down on payday loans, refund anticipation loans and vehicle title loans provided to active-duty military personnel and their dependents.  In 2015, regulators decided it was too easy to evade the restrictions placed on these loans, so the MLA now extends to most consumer credit transactions.  Compliance becomes mandatory in October, but restrictions on credit card accounts become mandatory in October 2017. 

Even if you don’t lend to many military members, this regulation will have an operational impact on your credit union.  First, when you do make a covered loan to a member of the military, such loans are subject to a military APR of 36%.  This APR is calculated differently than the traditional APR under Regulation Z.  Most notably, it includes application fees. 

You already have an obligation under the MLA to identify military personnel.  But since many of you do not offer vehicle title loans, for example, this requirement wasn’t of great concern.  But now, with the expanded number of loans covered under the Act, you should know what procedures you are going to use to identify covered persons.  Two options provide you with a safe harbor to demonstrate compliance.  One option is to access an MLA database maintained by the Department of Defense.  A second option is to obtain a consumer credit report.    

On that note, I hope you had a nice weekend.  Now get to work!

August 15, 2016 at 8:32 am Leave a comment

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.

July 22, 2015 at 9:31 am 3 comments

Matz to DOD: Don’t go Loco on Payday Loan Reforms

No one celebrates Cinco de Mayo like the Irish, so it’s only natural that NCUA Chairwoman Debbie Matz went to Ireland to ratchet-up her spot-on criticism of the Department of Defense’s well intended but ill-conceived proposal to cap most consumer credit at a military APR of 36%. The proposal sounds nice, but as she made clear in her speech before a gathering of the Defense Credit Union Council’s Overseas Subcommittee, it would do more harm than good when it comes to providing credit union services to members of the armed forces.

As I explained in a previous blog, the military is concerned about continued lending abuses. It argues that there are too many ways to get around restrictions on Payday loans, vehicle title loans, and refund anticipation loans. Its solution is to cap the APR on most consumer loans to active duty military personnel at a military APR of 36%. That means that there would now be a regular APR and a Military APR (MAPR). The MAPR would be calculated differently than the regular APR. It would include certain fees currently excluded from the calculation of APR under Regulation Z.

Just how restrictive is the proposed APR calculation? As Matz explained in her speech yesterday “We have done the math and found that when fees are included, many credit unions’ short-term loans would exceed the 36 percent Military APR limit. Unfortunately, the Military APR limit would be violated even using what we know are reasonably priced products designed to provide affordable alternatives to predatory loans.” This means that the payday loan alternatives offered by credit unions such as Pentagon Federal would violate these regulations. Is this a good thing? Only if you don’t want members of the armed forces to get access to reasonably priced credit.

Chairwoman Matz also used the speech to urge the CFPB not to implement payday loan protections that are so restrictive that they also inhibit the ability of credit unions to offer legitimate shorter term loans. She was commenting on what my colleague Mike Carter has described as the Bureau’s proposed proposal to impose ability-to-repay underwriting requirements on payday loans. I’m not as concerned about the Bureau’s proposal at this point. A formal regulation has not been put forward and the CFPB commented with approval on NCUA’s short term lending alternatives even as it proposed payday lending restrictions.

Chairwoman Matz deserves credit for forcefully criticizing the MAPR proposal first in a comment letter and now in yesterday’s speech. But I will take the criticism one step further. Even if credit unions are excluded from its grasp, establishing a two-tiered lending system with separate lending criteria for the military and the general public is a dumb idea that will make it impossible for all but the largest institutions to cost effectively offer consumer credit to military personnel.

Recently, the House Armed Services Committee narrowly defeated a proposal sponsored by Democrat Tammy Duckworth to delay any further rules in this area pending additional review. This is unfortunate. If the DOD goes forward with its MAPR regulation in anything close to its existing form, I’ll bet that Congress will have to overturn the regulation within two years. As soon as the best intentions of consumer advocates clash with reality, no one is going to be in favor of a regulation that makes it more difficult to give consumer credit to members of our armed services.

May 6, 2015 at 8:31 am 1 comment

Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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