Following the advance notice DCUC provided members yesterday, here is a more detailed summary of the guidance from DoD on 19 compliance issues under the July 2015 Military Lending Act rule. Here is the link to the document, which is issued as an interpretive rule, published in the Federal Register and effective today.
As we indicated yesterday, the interpretive rule provides answers to some basic operational questions, including:the application of the MLA to overdraft products; an explanation that creditors may waive fees to avoid assessing a borrower a military annual percentage rate (MAPR) over 36%; a discussion of how to determine when fees are to be included in the MAPR;a description of how oral disclosures may be provided; procedures for using a savings clause in a credit agreement to exclude MLA-covered borrowers from prohibited terms that otherwise apply to non-covered borrowers; the circumstances for delayed disclosures;a policy that the rule limitation on a creditor’s access to a borrower’s deposit or savings account does not preclude a borrower from granting a security interest in the account to the creditor as well as other issues.
Below is the list of all the questions and excerpts of key aspects of DoD’s response to each. Bottom Line Up Front (BLUF): Review your credit union policies and procedures including an assessment of all fees and lending practices to keep in compliance with the law.
Once again, as the DoD’s full responses provide some additional information, we refer you to the entire answer to each question provided in the interpretive rule.
1. What types of overdraft products are within the scope of 32 CFR 232.3(f) defining “consumer credit”?
- An overdraft line of credit with a finance charge is a covered consumer credit product when: It is offered to a covered borrower; the credit extended by the creditor is primarily for personal, family, or household purposes; it is used to pay an item that overdraws an asset account and results in a fee or charge to the covered borrower; and, the extension of credit for the item and the imposition of a fee were previously agreed upon in writing.
- Other types of overdraft products not pursuant to a written agreement typically are not covered consumer credit.
2. Does credit that a creditor extends for the purpose of purchasing personal property, which secures the credit, (such as for furniture, parenthesis added), fall within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(iii) where the creditor simultaneously extends credit in an amount greater than the purchase price?
- To qualify for the purchase money (which does not include providing additional cash to the borrower, parenthesis added) from the definition of consumer credit, a loan must finance only the acquisition of personal property.
- Any credit transaction that provides purchase money secured financing of personal property along with additional “cash-out” financing is not eligible for the exception under § 232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.
3. Under 32 CFR 232.4(b), are creditors permitted to waive fees or periodic charges at the end of a billing cycle or earlier for open-end credit, in order to prevent a borrower from being assessed a military annual percentage rate (MAPR) in excess of 36 percent during that billing cycle?
- Nothing in 32 CFR part 232 prohibits a creditor from complying by waiving fees or finance charges, either in whole or in part, in order to reduce the MAPR to 36 percent or below in a given billing cycle.
- A creditor could alternatively comply by not imposing charges in excess of 36 percent MAPR that would otherwise be permitted under the credit agreement.
4. Are fees that a creditor is required to pay by law and passes through to a covered borrower required to be included in the calculation of the MAPR?
- If such fees are considered “finance charges” under Regulation Z, then such fees must be included in the calculation of the MAPR, unless they are bona fide fees charged to a credit card account that are excludable under § 232.4(d).
- If the fees are not “finance charges” under Regulation Z, then they may be excluded from the calculation of the MAPR, provided they do not qualify for any of the other categories of charges listed under § 232.4(c)(1).
5. For open-end credit, what constitutes a situation where the MAPR cannot be calculated because there is “no balance” in the billing cycle under 32 CFR 232.4(c)(2)(ii)(B)?
- If the MAPR cannot be calculated in a billing cycle because there is “no balance” in the billing cycle, a creditor may not impose any fee or charge during that billing cycle, except for a participation fee that complies with the limitations set forth in § 232.4(c)(2)(ii)(B).
- Because the provision is tied to whether the MAPR can be calculated based on whether there is a balance in the billing cycle, creditors that impose fees or charges that are excluded from the calculation of the MAPR during a particular billing cycle are not subject to the limitations in § 232.4(c)(2)(ii)(B) for that billing cycle, as there would be no MAPR to calculate whether or not there was a balance during the billing cycle.
- For example, if a creditor charged a late fee for a late payment in accordance with its credit agreement with the covered borrower and in compliance with Regulation Z, the creditor may charge the fee, regardless of whether there is a balance in the billing cycle, because a late fee is not among the charges that are included in the calculation of the MAPR.
- Under 12 CFR 1026.14(c)(2), if there is no balance to which the charge is applicable, an effective annual percentage rate cannot be determined under the section.
6. Is a minimum interest charge that a creditor may charge a covered borrower as part of a credit card account under an open-end (not home-secured) consumer credit plan and that is generally disclosed in the account-opening table under 12 CFR 1026.6(b)(2)(iii) eligible as a bona fide fee excludable from the calculation of the MAPR?
- A minimum interest charge that a creditor will charge a covered borrower if the creditor charges interest during a particular billing cycle for a credit card account under an open-end (not home-secured) consumer credit plan is generally required to be disclosed in the account-opening table under 12 CFR 1026.6(b)(2)(iii). Such a charge is not a periodic rate.
- A minimum interest charge that is generally disclosed in the account-opening table under 12 CFR 1026.6(b)(2)(iii) (even if it does not exceed the threshold for required disclosure in the account-opening table under 12 CFR 1026.6(b)(2)(iii)) may be a bona fide fee excludable from the calculation of the MAPR if it meets the conditions for exclusion.
7. Under 32 CFR 232.4(d)(3)(ii), may creditors rely on commercially compiled sources of information in conducting calculations necessary for the conditional reasonable bona fide credit card fee safe harbor?
- Generally, yes.
- Nothing in 32 CFR Part 232 prohibits a credit card issuer from relying on information sources compiled in commercially available databases or other industry sources in making safe harbor calculations.
- However, the safe harbor under § 232.4(d)(3)(ii) is available only if the amount of the fee is actually less than or equal to an average amount of a fee for the same or a substantially similar product or service charge 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.
8. Under 32 CFR 232.4(d), is it permissible to consider benefits provided by credit card rewards programs in determining whether the amount of a fee is (a) less than or equal to an average amount of a fee for a substantially similar product or service for purposes of comparison under the safe harbor and (b) reasonable overall?
- Generally, yes, …creditors may consider rewards program benefits in determining whether the amount of a fee is less than or equal to an average amount of a fee for a substantially similar product or service for purposes of the safe harbor in § 232.4(d)(3)(ii).
9. Under 32 CFR 232.5(b), is an assignee permitted to avail itself of a covered borrower identification safe harbor if the assignee has maintained the original creditor's record of a covered borrower check?
- Yes. Under § 232.3(i)(2) a creditor, by definition, includes the creditor's assignee.
- The Department's policy is to extend the covered borrower check safe harbor to a creditor's assignee, provided that the assignee continues to maintain the record created by the creditor that initially extended the credit.
10. Does the historic lookback provision of 32 CFR 232.5(b)(2)(B) prevent creditors from adopting a risk management plan that includes periodically screening credit portfolios to discover changes to covered borrower status?
- No. Section 232.5 explains the methods available to creditors when determining a consumer's covered borrower status prior to or at the time the parties enter into a transaction or an account is created.
- The plain language of the regulation does not prohibit a creditor or assignee from accessing the DMDC database for other purposes, such as determining whether a previously covered borrower retains that status.
- However, as stated in § 232.7, other State or Federal laws providing greater protections to covered borrowers may apply to covered transactions under the MLA. Creditors should ensure compliance with any such laws that may apply to them and these transactions.
11. Does the particular internet address referenced in 32 CFR 232.5(b)(2) limit the availability of a safe harbor for a covered borrower check conducted through alternative methods of accessing the MLA database provided by the Department?
- No. Section 232.5(b)(2) references a uniform resource locator (URL), more commonly known as an Internet address, as a convenience to assist the public in locating the DMDC MLA database.
- However, that particular URL address itself does not serve as a restriction on the method through which the DMDC MLA database is accessed. For technological reasons, the Department may from time to time revise the DMDC MLA URL through providing notice on the DMDC MLA Web page.
- A creditor who makes a determination regarding the status of a consumer by accessing the database maintained by the DMDC through a URL provided by the DMDC that is different from the one specifically referenced in § 232.5(b)(2) may still take advantage of the safe harbor in § 232.5(b)(1), so long as the creditor timely creates and thereafter maintains a record of the information so obtained as provided in § 232.5(b)(3).
12. How may a creditor orally provide the payment obligation disclosure required under 32 CFR 232.6(a)(3) to meet the requirements of 32 CFR 232.6(d)(2)?
- Under the Department's approach, a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.
13. If a creditor chooses to provide the information that is required to be provided orally by providing a toll-free telephone number, consistent with 32 CFR 232.6(d)(2)(ii)(B), when must the information be available to the borrower?
- Oral disclosures provided through a toll-free telephone system need only be available under § 232.6(d)(2)(ii)(B) for a duration of time reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.
14. In circumstances where Regulation Z allows a creditor to provide disclosures after the borrower has become obligated on a transaction (as in the case of purchase orders or requests for credit made by mail, telephone, or fax), does the MLA provide for similarly delayed disclosure?
- The requirement in § 232.6(a) that any disclosure required by Regulation Z be provided only in accordance with the requirements of Regulation Z does not amount to a requirement that MLA-specific disclosures be separately provided to borrowers in advance of TILA disclosures.
- Thus, the disclosures required in § 232.6(a) may be provided at the time prescribed in Regulation Z.
15. Under 32 CFR 232.8, within a single credit agreement may creditors permissibly use a “savings clause” that excludes covered borrowers from prohibited notice, waiver, arbitration, or other terms that would otherwise be applicable to non-covered borrowers?
- Under the MLA, a creditor may include a proscribed term under § 232.8, such as a mandatory arbitration clause, within a standard written credit agreement with a covered borrower, provided that the agreement includes a contractual “savings” clause limiting the application of the proscribed term to only non-covered borrowers, consistent with any other applicable law.
16. Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from repaying a credit transaction by check or electronic fund transfer?
- In no case does paragraph (e) prevent covered borrowers from tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor.
- Section 232.8(e) also does not prohibit a covered borrower from authorizing automatically recurring payments, provided that such recurring payments comply with other laws, such as the Electronic Fund Transfer Act and its implementing regulations, including 12 CFR 1005.10, as applicable.
- § 232.8(e) prohibits a creditor from using the borrower's account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower.
- A creditor may not use a post-dated check provided at or around the time credit is extended that deprives the borrower of control over payment decisions, as is common in certain payday lending transactions.
- Covered borrowers may tender checks and authorize electronic fund transfers by specifying permissible actions creditors may take to secure repayment by covered borrowers.
- A creditor may require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law.
- 12 CFR 1005.10(e)(1) prohibits anyone from conditioning an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers (except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account).
- However, a preauthorized electronic fund transfer is defined under 12 CFR 1005.2(k) as an electronic fund transfer authorized in advance to recur at substantially regular intervals.
- In addition, § 232.8(e)(2) clarifies that a creditor is permitted to require direct deposit of the consumer's salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law.
- While § 232.8(g) prohibits a creditor from requiring as a condition for the extension of consumer credit that the covered borrower establish an allotment to repay an obligation, the regulation does not apply this restriction to a “military welfare society” or a “service relief society” as defined in 37 U.S.C. 1007(h)(4).
17. Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from granting a security interest to a creditor in the covered borrower's checking, savings or other financial account?
- No. The prohibition in § 232.8(e) does not prohibit covered borrowers from granting a security interest to a creditor in the covered borrower's checking, savings, or other financial account, provided that it is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation including the limitation on the MAPR to 36 percent.
- Section 232.8(e)(3) further clarifies that covered borrowers may convey security interests in checking, savings, or other financial accounts by describing a permissible security interest granted by covered borrowers.
- Thus, for example, a covered borrower may grant a security interest in funds deposited in a checking, savings, or other financial account after the extension of credit in an account established in connection with the consumer credit transaction.
18. Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit a creditor from exercising a statutory right to take a security interest in funds deposited within a covered borrower's account?
- No. § 232.8(e) does not impede a creditor from exercising a statutory right to take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation, including the limitation on the MAPR to 36 percent.
19. Under 32 CFR 232.3(f)(2)(ii) and 232.8(f) what methods of transportation are includedwithin the definition of a “vehicle”?
- For purposes of the MLA, the term “vehicle” means any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation. The term does not include motor homes, recreational vehicles (RVs), golf carts, or motor scooters.
As we noted yesterday, more questions about implementation of the MLA likely remain and additional ones may develop.DCUC will continue our proactive efforts on behalf of our members to work with DoD and our contacts at the CFPB to obtain further clarifications as needed. Please contact Anthony Hernandez, DCUC Chief Operating Officer at (202) 638-3950 or send email to firstname.lastname@example.org if you have additional questions or concerns.