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On July 27, the FTC announced it is partnering with state and local authorities to host the Protecting Military Consumers: A Common Ground Conference on September 7 in Los Angeles to provide training on consumer fraud and other issues affecting servicemembers and their families. The conference is geared towards military attorneys, law enforcement personnel, and consumer protection officials, and will include the following topics:
- student loans and for-profit colleges;
- identity theft and imposter scams;
- debt collections;
- mortgage disputes; and
- real estate fraud.
Additionally, the conference will discuss several federal, state, and local consumer protection laws, including the Servicemembers Civil Relief Act, the Military Lending Act, and FTC and CFPB rules and regulations.
Earlier in July, the FTC held a Military Consumer Financial Workshop to educate consumers on financial issues and scams they may face. (See previous InfoBytes coverage here.)
On July 7, the Office of the Comptroller of the Currency (OCC) announced the release of its Semiannual Risk Perspective for Spring 2017 indicating key risk areas for national banks and federal savings associations. Acting Comptroller of the Currency Keith Noreika pointed out in his remarks that, “[w]hile these are risks that the system faces as a whole, we note that the risks differ from bank to bank based on size, region, and business model. Compliance, governance, and operational risk issues remain leading risk issues for large banks while strategic, credit, and compliance risks remain the leading issues for midsize and community banks.”
The report details the four top risk areas:
- Elevated strategic risk—banks are expanding into new products and services as a result of fintech competition. According to the report, this competition is increasing potential risks. The OCC hopes to finish developing a special purpose banking charter for fintech companies soon.
- Increased compliance risk—banks must comply with anti-money laundering rules and the Bank Secrecy Act in addition to addressing increased cybersecurity challenges and new consumer protection laws.
- Upswing in credit risk—underwriting standards for commercial and retail loans have been relaxed as banks exhibit greater enthusiasm for risk and attempt to maintain loan market share as competition increases.
- Rise in operational risk—banks face increasingly complex cyber threats while relying on third-party service providers, which may be targets for hackers.
The report used data for the 12 months ending December 31, 2016.
Texas Governor Passes Legislation Related to Vehicle Installment Contracts, Documentary Fees, and Deferred Presentment Transactions for Military Borrowers
On June 9, Texas Governor Greg Abbott signed legislation (H.B. 2339) amending the state’s Finance Code provisions governing trade-in credit agreements related to motor vehicle retail installment contracts. The law now authorizes a seller—upon execution of a contract—to offer to sell to a buyer a “trade-in credit agreement,” which is “a contractual arrangement under which a retail seller agrees to provide a specified amount as a motor vehicle trade-in credit for the diminished value of the motor vehicle that is the subject of the retail installment contract in connection with which the trade-in credit agreement is offered if the motor vehicle is damaged but not rendered a total loss as a result of a collision accident, with the credit to be applied toward the purchase or lease of a different motor vehicle from the retail seller or an affiliate of the retail seller.” Specifically, a trade-in credit agreement is separate from a retail installment contract, not a term of the retail installment contract, and not insurance. The law further outlines changes related to the amount charged for a trade-in credit agreement as well as terms and conditions of the retail installment contract. The law takes effect September 1, 2017.
On June 15, the governor signed legislation (H.B. 2949) relating to the maximum amount a retail seller of motor vehicles can charge for a documentary fee. Under the changed provisions, a seller is now required to provide written notice to the finance commission of the amount it intends to charge unless the documentary fee is considered reasonable, which is established as an amount “less than or equal to the amount of the documentary fee presumed reasonable . . . by rule of the finance commission.” In determining whether a fee is reasonable, the commissioner considers the resources a retail seller may need to employ to perform its duties when handling and processing documents related to the sale and financing of the vehicle. The law takes effect September 1, 2017.
Separately on June 15, the governor signed legislation (H.B 2008) amending the Texas Finance Code to require a lender that enters into a deferred presentment transaction with a military servicemember or a dependent of a servicemember to comply with the Military Lending Act (MLA) (10 U.S.C. § 987) and its implementing regulation. The MLA prohibits creditors from extending consumer credit if the “creditor rolls over, renews, repays, refinances, or consolidates any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower.” Creditors engaged in deferred presentment transactions or similar payday loan transactions are subject to these limitations “provided however, that the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union.” The law takes effect September 1, 2017.
On October 31, the CFPB released the 13th Edition of its Supervisory Highlights Report, covering the period May through August of this year. The report shares recent supervisory observations in the areas of automobile loan origination, automobile loan servicing, debt collection, mortgage origination, mortgage servicing, student loan servicing, and fair lending. The report found that the CFPB’s recent supervisory actions returned more than $11 million to approximately 225,000 consumers. The Bureau also set forth new examination procedures for reverse mortgage servicing, student loan servicing, and the Military Lending Act.
On October 7, following the Federal Reserve’s and the CFPB’s leads, the OCC released Bulletin 2016-33 advising financial institutions of updated interagency examination procedures for compliance with the Department of Defense’s (DoD) Military Lending Act (MLA) July 2015 final rule. As previously summarized in BuckleySandler’s Special Alert, the DoD issued an interpretive rule regarding the amendments to the regulations implementing the MLA on August 26, 2016. The 2015 final rule went into effect for consumer credit products other than credit cards on October 3, 2016. The requirements will take effect for credit card accounts one year later, on October 3, 2017. The OCC plans to include the updated interagency examination procedures in the Comptroller’s Handbook.
On September 29, the Federal Reserve released the interagency examination procedures for the DOD’s Military Lending Act (MLA) final rule published in July of 2015. Also on September 29, the CFPB released its own examination procedures under the final rule, providing guidance as to how the CFPB will conduct reviews under what will be a broader scope of coverage under the MLA, including credit cards, deposit advance products, overdraft lines of credit (not traditional overdraft services), and certain types of installment loans. The final rule goes into effect on Monday, October 3 for most extensions of consumer credit to active duty servicemembers and their dependents.
On August 29, OCC Senior Deputy Comptroller Grovetta Gardineer delivered remarks at the 2016 Association of Military Banks of America Workshop, emphasizing the significance of banks’ compliance with the Servicemember Civil Relief Act (SCRA) and the Military Lending Act (MLA). Although Gardineer noted that SCRA-related issues have decreased since making SCRA compliance an examination focus, she stressed that room for improvement remains. Gardineer advised banks to perform due diligence with third-party vendors, noting that banks “will be held accountable for failures” by their third-party vendors. Gardineer further cautioned that, in light of the new MLA requirements taking effect on October 3, banks must ensure that they properly identify military borrowers entitled to the MLA’s expanded coverage, which will include “nearly all consumer credit covered under the Truth in Lending Act.”
Special Alert: Department of Defense Issues Interpretive Rule Regarding Compliance with the Military Lending Act
Today, the Department of Defense (“DoD” or “Department”) published in the Federal Register an interpretive rule regarding compliance with its July 2015 amendments to the regulations implementing the Military Lending Act (“MLA”). The July 2015 amendments will extend the MLA’s 36% military annual percentage rate (“MAPR”) cap, ban on mandatory arbitration, and other limitations to a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”). Compliance is mandatory beginning on October 3, 2016, except that credit card issuers have until October 3, 2017 to comply. Additional BuckleySandler materials on the MLA amendments are available here, here, and here.
DoD stated that the interpretive rule “does not substantively change the [July 2015] regulation implementing the MLA, but rather merely states the Department’s preexisting interpretations of an existing regulation” and thus is effective immediately upon publication. The DoD also emphasized that the guidance provided in the rule “represent[s] official interpretations of the Department….”
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Valerie L. Hletko, (202) 349-8054
- Manley Williams, (202) 349-8060
- Sasha Leonhardt, (202) 349-7971
- Andrew W. Grant, (202) 349-8056
On July 11, the OCC released its Semiannual Risk Perspective for Spring 2016, which generally provides an overview of supervisory concerns for the federal banking system and specifically presents data as of December 31, 2015 in the following areas: (i) operating environment; (ii) bank performance; (iii) key risk issues; and (iv) regulatory actions. Similar to the fall 2015 report, the current report identifies cybersecurity, third-party vendor management, business continuity planning, TRID, and BSA/AML compliance, among other things, as key areas of potential operational and compliance risk. Further, the report highlights the new Military Lending Act rule, effective October 3, 2016, as a new key potential risk. According to the report, the OCC’s supervisory priorities for the next twelve months will generally remain the same; moreover, the outlook for the OCC’s Large Bank Supervision and Midsize and Community Bank Supervision operating units will remain broadly similar.
100 Days Until the MLA: Compliance Challenges and Open Questions Before the New MLA's Rule Implementation
With only 100 days until the new Military Lending Act (MLA) rule takes effect on October 3, 2016, many financial institutions have begun enacting procedures to ensure they are compliant with the new regulation by the effective date. With the implementation of this new rule, financial institutions continue to work towards full compliance with the requirements imposed by the Department of Defense (DoD), but there are growing pains. As this deadline draws near, there are several important compliance concerns that financial institutions must keep in mind and a number of issues where the industry is concerned about unclear language.
What types of credit are covered by the new MLA rule?
The 2007 MLA rule was limited to three specific types of products: payday loans, vehicle title loans, and refund anticipation loans. However, under the new rule, the MLA will cover a far broader range of products. The DoD sought to match the definition of credit under the Truth in Lending Act’s (TILA) implementing regulation—Regulation Z—so the new MLA rule will cover any credit that is (i) primarily for personal, family, or household purposes, and (ii) either subject to a finance charge under Regulation Z or payable by written agreement in more than four installments.
However, the new MLA rule excludes four specific types of transactions:
- Residential mortgages, which are defined as credit transactions secured by an interest in a dwelling. This includes purchase money home mortgages, as well as construction mortgages, refinance mortgages, home equity loans, home equity lines of credit, and reverse mortgages.
- Motor vehicle purchase loans that are secured by the vehicle being purchased. Importantly, motor vehicle refinance loans are not excluded, and therefore are covered by the new MLA rule.
- Personal property purchase loans that are secured by the personal property that is being purchased. As with motor vehicle refinance loans, any refinance or other non-purchase loan secured by personal property is not exempt from MLA compliance.
- Any transaction exempt from TILA (other than pursuant to a state exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z (such as business-purpose loans).
How do I determine if a customer is a covered borrower under the MLA? What is the MLA safe harbor?
The MLA only applies to “covered borrowers,” a term that includes individuals who are servicemembers or the dependents of servicemembers at the time a qualifying loan was originated. Under the new MLA rule, there are four different safe harbors that a creditor may use to determine if a customer is a covered borrower:
- Online MLA Database (Individual Record Request): This is a free resource provided by the Department of Defense Manpower Data Center (DMDC) that requires the lender to manually enter a customer’s last name and date of birth/Social Security number to obtain a single result from a website. It provides a results certificate in seconds if the database is operational.
- Online MLA Database (Batch Record Request): This is a free resource provided by the DMDC that permits a creditor to upload a spreadsheet with identifying information for up to 250,000 individuals, and the system provides results within 24 hours if the database is operational.
- DMDC Direct Connection: This is a free resource provided by the DMDC that will permit certain large creditors to access the DMDC through a direct data link and obtain results instantaneously. The DMDC is still working to set this up and there will only be a handful of connections available to the largest creditors.
- Consumer Reporting Agency: Under the MLA rule, a code in a consumer report received from a consumer reporting agency can also provide safe harbor protection. Although there are many benefits to this approach, there will be a cost associated with it, and it is unclear if it will be available prior to the October 3, 2016 implementation deadline.
As long as a creditor retains the results of the safe harbor search, these results are “legally conclusive,” even if the customer was in fact on military service at the time of origination or account opening.
What is the Military APR (MAPR)?
The new MLA rule, like its 2007 predecessor, applies a MAPR cap of 36 percent to any debt that is covered by the MLA. The MAPR includes both the finance charges that are included under the Regulation Z APR calculation, as well as credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other costs and fees.
The MAPR need not be disclosed. However, in many instances, creditors need to refine their existing systems—or create a new system—to calculate the MAPR on a billing period-by-billing period basis to ensure that the MAPR never exceeds 36 percent in any billing cycle for as long as the customer remains a covered borrower.
What other protections are provided by the new MLA rule?
In addition to the 36 percent MAPR limit, the MLA rule also places several other limits on the terms of an extension of credit to a covered borrower. Under the MLA, a creditor may not:
- Roll over, renew, repay, refinance or consolidate any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower
- Require the borrower to waive his or her right to legal recourse under any state or federal law
- Require the borrower to submit to arbitration or impose onerous legal notice requirements in the event of a dispute
- Demand unreasonable notice from the borrower as a condition for a legal action
- Use a check or other method to access a consumer’s financial account, with certain exceptions
- Use a vehicle title as a security for an obligation, with certain exceptions
- Require the consumer to establish an allotment to repay the debt
- Prohibit the consumer from prepaying the credit or impose a prepayment penalty
What disclosures must be provided under the new MLA rule?
The MLA rule requires three different written disclosures to the consumer before or at the time the borrower becomes obligated on the account: (1) a statement regarding the MAPR (which is not a disclosure of the numeric MAPR and may be satisfied using a model statement provided in the rule itself); (2) any disclosures required by Regulation Z; and (3) a clear description of the payment obligation of the borrower (which may be a payment schedule for closed-end credit or an account opening disclosure for open-end credit).
In addition, the MAPR statement and the description of the payment obligation must also be offered to the consumer orally before or at the time the borrower becomes obligated on the account. A creditor can satisfy this requirement by either providing the information to the customer in person, or by providing a toll-free telephone number that the consumer may call to obtain this information.
Are credit cards covered under the new MLA rule?
Yes, credit cards are covered under the new MLA rule. However, credit card issuers have an additional year to comply with the MLA rule’s requirements and need not have their compliance plans in place until October 3, 2017.
As we approach the October 3, 2016 implementation date, what are some areas of uncertainty under the MLA rule?
As it is currently written, there are several loan products and scenarios covered by the new rule where it is unclear how regulators and the courts will apply the MLA’s protections. Among the areas where there is some uncertainty under the MLA are the following:
- How can creditors ensure full compliance with the oral notice requirements under the MLA? Is it necessary to provide account-specific disclosures orally before the loan has been made and boarded onto the lender’s system?
- For creditors issuing credit based upon a telephone call from a consumer, how can they best comply with the requirement to provide written disclosures before the borrower becomes obligated?
- How can creditors best structure their account agreements so that they can use one account agreement for both MLA and non-MLA customers?
- If a creditor assigns an account to a third party, can the third party also enjoy the protections of the MLA covered borrower safe harbor?
- If the consumer reporting agencies have not reached an agreement with the DMDC to provide active duty information, how can financial institutions determine military status when issuing credit through instantaneous, automated (e.g. online or retail point-of-sale) channels?
- Jonice Gray Tucker to join CFPB panel at CBA’s Washington Forum
- Jonice Gray Tucker to moderate “Pandemic relief response and lasting impacts on access, credit, banking, and equality” at the American Bar Association Business Law Section Spring Meeting
- Jeffrey P. Naimon to discuss "Post-pandemic CFPB exam preparation" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Making fair lending work for you" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Reading the tea leaves of President Biden’s initial financial appointees" at LendIt Fintech
- Moorari K. Shah to discuss “CA, NY, federal licensing and disclosure” at the Equipment Leasing & Finance Association Legal Forum
- Jonice Gray Tucker to discuss "Compliance under Biden" at the WSJ Risk & Compliance Forum
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference