Posts tagged ‘Military Lending Act’

Did The CFPB Just Do a Power Grab?

Today the CFPB will be publishing in the Federal Register an interpretive ruling explaining why it has the authority to examine the institutions it directly supervises for compliance with the Military Lending Act. Since most of you work for credit unions that have less than $10 billion in assets this document won’t have an impact on your operations, but here’s why you should care:

The Military Lending Act was passed in 2006 as a narrowly focused piece of legislation to protect our service men and women from some of the most egregious predatory lending in existence at the time. After all, there should be a special place in hell for people who specialize in ripping off the underpaid men and women who protect us. Unfortunately, the MLA has been transformed via the rulemaking process from a reasonable piece of legislation into a regulatory monstrosity replete with its own Military APR and its own interest rate cap. But that is water under the bridge.

Another unique aspect of the MLA is that it is not included in the expansive list of federal consumer financial protection laws which congress explicitly listed when it passed the Dodd-Frank Act. Nevertheless, this did not become an issue until 2018 when the CFPB announced that it would no longer conduct MLA examinations as part of its oversight over the institutions it directly supervised because it lacked the legislative authority to do so.

Let’s be honest, to his critics, Mick Mulvaney’s oversight of the CFPB is remembered about as fondly as Voldemort’s rule over Hogwarts.  In our polarized political world the idea that an agency would unilaterally limit its own power was of course met with howls of outrage even though Congress could have and should have easily amended existing law to give the CFPB examination authority. Besides, the CFPB still had the authority to bring enforcement actions against lenders who violated the MLA. 

The language is pretty clear, or so I thought.  §125 provides in part (1) IN GENERAL —The Bureau shall have exclusive authority to require reports and conduct examinations on a periodic basis of persons described in subsection (a) for purposes of— (A) assessing compliance with the requirements of Federal consumer financial laws; (B) obtaining information about the activities subject to such laws and the associated compliance systems or procedures of such persons…

Congress took the time to list precisely what laws were to be considered Federal consumer financial laws and the MLA wasn’t put on the list.

It ends up that we didn’t need to change a law, we simply needed to change administrations. In its interpretive ruling the CFPB explains how, notwithstanding the fact that Congress drafted a definitive list of statutes over which the CFPB would have examination authority, the MLA is also within the CFPB’s scope of authority.

This is the latest example of the CFPB stretching its already enormous powers. The problem is that we live in a nation of laws, not regulations. The same people who complement the CFPB today will be the same people criticizing the CFPB for ignoring the role of Congress next time a Republican administration takes over the CFPB.  It’s time for everyone to remember that in a republic, the ends don’t justify the means.  We simply don’t get to ignore the laws we don’t like or the processes we have in place to change them. 

June 23, 2021 at 9:24 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

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

Military Misfires on Consumer Protection

Today’s blog provides a good example of how well-intentioned people can end up doing more harm than good.  The Department of Defense recently proposed expanding the coverage of consumer protection laws that currently apply to pay-day loans, refund anticipation loans and vehicle title loans to most consumer loans covered by the Truth in Lending Act. It would not apply to loans to purchase a vehicle or a home.  If the DOD isn’t careful, it will dry up the swamp of creditors who prey on our service members, which of course is a good thing, but do so in a way that will make it more difficult for members of the armed forces to get access to consumer credit, especially from credit unions.  Here’s why.

Back in 2007, responding to wide spread reports of predatory lending activities targeting the military, Congress passed the Military Lending Act.  The Act empowered the Department of Defense to define and regulate consumer credit products provided to active duty members of the armed forces and their dependents.  It gave the military wide discretion in determining what products would be subject to the enhanced regulatory restrictions.  Under the regulations promulgated by the DOD, a 36% interest rate cap was placed on refund anticipation loans, pay-day loans, and vehicle title loans.  In addition, the cap is calculated based on the Military Annual Percentage Rate (MAPR), which is succinctly summarized by the CFPB to include interest, fees, credit service charges, credit renewal charges, credit insurance premiums and other fees related to credit products sold in connection with the loan.  Creditors selling these loans have to provide enhanced disclosures, as well as take affirmative steps to identify eligible consumers.

At the time the legislation was enacted, credit unions and other financial institutions were concerned that if regulations were written too broadly, they would require the wide-spread adoption of two types of consumer loan products:  one for the military and one for civilians.  However, the final regulations were narrow enough in scope so that they didn’t impact the vast majority of credit unions, most of which would have no desire to offer these types of products in the first place, even if located in states where they were permitted to do so.

The statute as it has been implemented by the DOD made sense, at least until last Friday.  The DOD is proposing regulations that would expand the definition of products covered under the statute to include credit cards and other consumer loans covered under the Truth in Lending Act.  As a result, credit cards offered to members of the military and their dependents would be subject to a 36% cap calculated by a refined MAPR.  To be fair, the military recognizes that a poorly drafted regulation runs the risk of denying mainstream credit to members of the armed forces, so it is refining the MAPR to, for example, exclude customary and reasonable fees.  But the calculation of an MAPR would still differ for members of the military and civilians.  Furthermore, by expanding the reach of the MLA to most consumer loans except home mortgages and car loans, the military will make it more difficult for credit unions to provide legitimate loans to service members.

In fact, the proposal is such a bad idea that NCUA took the highly unusual step of issuing a statement critical of the proposal the same day it was announced.  It pointed out that NCUA’s pay-day lending alternative was designed specifically to fit within the Department’s existing regulations.

Current NCUA regulations allow federal credit unions to offer payday alternative loans with an interest rate of up to 28 percent and an application fee of up to $20. Under the Military Lending Act regulations, consumer credit to covered borrowers is subject to a 36 percent cap on the military annual percentage rate, or military APR, which includes application fees. If these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap.

Conversely, our good friends at the bureau that never sleeps, the CFPB, thinks the Department’s proposal is a swell idea.  Proponents of the DOD’s approach point out that it is extremely easy to avoid compliance with the MLA.  For example, a loan with a 91-day repayment period isn’t classified as a pay-day loan under the regulations, but a 90-day loan could be.  They argue that by expanding the size of the jurisdictional net, it will be easier to catch those creditors who prey on members of our armed forces.  The problem with larger fishing nets, of course, is that they scoop up everything in their wake, including fish that no one wants to catch in the first place.

Perhaps DOD should consider expanding the definition of the existing products covered under the MLA rather than grabbing everything into its jurisdiction.  Another alternative, which it notes in the preamble that it is open to considering, is to exempt certain types of institutions from coverage of the expanded regulations.  Considering that federal credit unions are already subject to an interest rate cap on loans and that the vast majority of credit unions are places that members of the military looking for a fair deal should be encouraged to patronize, an exemption makes sense to me.

At ease.

October 1, 2014 at 8:30 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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