InfoBytes Blog

OCC Releases Semiannual Risk Perspective Report

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.

OCC Anti-Money Laundering Bank Secrecy Act Bank Supervision Military Lending Act Risk Management TRID Vendor Management Privacy/Cyber Risk & Data Security

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?

Military Lending Act

Spotlight on the Military Lending Act, Part 3: Falling in Line with MLA Compliance

With recent changes in the regulations implementing the Military Lending Act (“MLA”), creditors are now reevaluating their compliance plans to ensure they are prepared for the new regulations.  Although there is no formal guidance on what federal regulators will look for in reviewing MLA compliance, the commentary that accompanied both the proposed and final rule gives some insight as to where regulators will focus examination and enforcement resources.  Below, we discuss some of these likely areas of focus, and offer suggestions for how institutions can prepare for regulatory scrutiny.

Determining military service and MLA safe harbor provisions

The MLA only applies to a “covered borrower,” which is either a servicemember (as defined under the MLA) or a servicemember’s dependent.  The MLA provides two safe harbors to determine if a consumer is a covered borrower:  (1) a set of results from the DoD’s MLA database, or (2) a military status indicator in a consumer report.

Although both of these approaches are optional—and a creditor may use a different method to determine if an individual is eligible for MLA protection—they provide several benefits.  They are both determinative, so even if the borrower is in fact a servicemember a safe harbor check that shows otherwise will govern.  Both checks can also be done without

inconveniencing the consumer or requiring them to attest to their military status.

However, these safe harbor approaches are only effective if the results are actually retained by the creditor.  Since military status checks must be performed at origination, we recommend that the results of these checks be retained with the origination documents.  Not only does the outcome of the military status check determine the substantive terms of the actual credit obligation, but by keeping all of these documents together, a creditor can ensure that they have all of the governing origination documents are in a single, secure location.

Ancillary products and calculation of the Military APR (“MAPR”)

In crafting the new MLA rules, the Department of Defense expanded the list of items to include in calculating the MAPR.  One of the most significant changes is the addition of fees paid “for a credit-related ancillary product sold in connection with the credit transaction.”  Although the MAPR limit is 36%, ancillary product fees can add up and—especially for accounts that carry a low balance—can quickly exceed the MAPR limit.  This broad definition of the interest rate under the MLA also coincides with the expansive approach that federal regulators have taken regarding enforcement of the interest rate limitations under another military protection statute, the Servicemembers Civil Relief Act.  The CFPB has made no secret of the fact that it reviews add-on products closely, and we expect the Bureau to use the MLA as another method of targeting ancillary products.

Prohibition against mandatory arbitration

Although most of the focus has been on the revised MAPR requirements in the new rules, the MLA has prohibited mandatory arbitration for eligible accounts since 2007.  While this provision remains the same under the new MLA rules, what has changed since 2007 is a renewed focus on mandatory arbitration by federal regulators.  Since the CFPB’s creation in 2011, mandatory arbitration—and its impact on consumers—has been a key area of focus for the Bureau.  With the CFPB’s Office of Servicemember Affairs closely watching any practices that may harm military borrowers and the Bureau’s overall focus on arbitration, we expect the arbitration provisions of the MLA to become a keen area for regulatory review.

MLA disclosure requirements compliance

Finally, the MLA requires special disclosure requirements for eligible loans.  While most creditors are familiar with the Truth in Lending Act (“TILA”) and Regulation Z disclosure requirements, the MLA also requires that the servicemember receive “a statement of the MAPR applicable to the extension of credit.”  This disclosure must be provided before or at the same time that the servicemember enters into the transaction.

To ensure compliance with the MLA, we recommend a streamlined, product-specific set of disclosures that an MLA-eligible consumer can receive at origination.  To protect against borrower claims of insufficient disclosures and post hoc regulatory scrutiny, we recommend that creditors retain copies of the MLA disclosures along with the original check of the MLA website and credit agreement.

SCRA Military Lending Act Ancillary Products Sasha Leonhardt

Spotlight on the Military Lending Act, Part 2: Planning for Compliance

Compliance with the revised Department of Defense (“DoD”) regulations under the Military Lending Act (“MLA”) is not mandatory until October 3, 2016 or, for most credit cards, until October 3, 2017.  However, as the recent implementation of the Dodd-Frank Act mortgage regulations shows, a year or even two can pass quickly.  Therefore, institutions should begin planning now.  The following are answers to three key questions that can help you start the planning process.

1. Which products will be covered by the revised MLA regulations?

The revised MLA regulations apply far beyond the narrow range of small dollar loan products covered today.  Instead, reflecting the DoD’s desire to match to the definition of consumer credit under the Truth in Lending Act’s Regulation Z, the MLA regulations will apply to credit offered or extended to a covered borrower that is:

• Primarily for personal, family, or household purposes; and
• Either subject to a finance charge or payable by a written agreement in more than four installments.

However, the following types of credit are excluded:

• Residential mortgages: Transactions secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling.
• Secured motor vehicle purchase loans: Transactions that are expressly intended to finance the purchase of a motor vehicle and are secured by that vehicle.
• Secured personal property purchase loans: Transactions that are expressly intended to finance the purchase of personal property and are secured by that property.
• TILA-exempt transactions: Transactions that are exempt from Regulation Z (other than pursuant to a State exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z.

Accordingly, the revised MLA regulations should not affect most mortgage, auto, or commercial lending.  The new regulations will, however, apply to most credit card accounts, overdraft or personal lines of credit, unsecured closed-end loans, and deposit advance products.  Therefore, institutions should focus on preparing the lines of business responsible for these products for compliance with the revised MLA regulations.

2. How will I determine who is a covered borrower?

If a product is covered by the MLA regulations, the next question is whether the borrower is also covered.  Creditors must build the systems and train their employees to determine whether the consumer is a “covered borrower” at the time the consumer becomes obligated or establishes an account.  To be a covered borrower, the consumer must be either:

• A “covered member,” which is a member of the armed forces who is serving on: (1) active duty under titles 10, 14, or 32 of the United States Code under a call or order that does not specify a period of 30 days or fewer; or (2) active guard and reserve duty under 10 U.S.C. 101(d)(6); or
• A “dependent” of a covered member as described in 10 U.S.C. 1072(2)(A), (D), (E), or (I), which includes: (1) a spouse; (2) a child under 21 (or 23 in certain circumstances); (3) a parent or parent-in-law dependent on the covered member for over one-half of their support and residing in the member’s household; and (4) certain persons over whom the covered member has legal custody.

While a creditor is permitted to use its own method to determine whether a consumer is a covered borrower, the revised regulations provide a safe harbor if the creditor relies on:

• Information obtained directly or indirectly from the DoD’s database; or
• A “statement, code, or similar indicator” of the consumer’s status in a consumer report obtained from a nationwide credit bureau meeting certain criteria.

3. What must be done for extensions of credit subject to the MLA?

When a covered consumer credit product is provided to a covered borrower, the creditor must comply with both substantive restrictions and disclosure requirements.

1. Substantive requirements

The Military Annual Percentage Rate (“MAPR”) cannot exceed 36 percent on a closed-end loan or in any billing cycle for an open-end credit account.  Accordingly, creditors must develop systems for calculating the MAPR.

The MAPR is generally calculated consistent with the APR in Regulation Z (for open end transactions, the MAPR is calculated like the “effective APR”).  However, while the Regulation Z APR includes only finance charges, the MAPR also includes credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other things.  For certain credit card accounts, the MAPR excludes “bona fide” fees that are comparable to fees “typically imposed by other creditors for the same or a substantially similar product or service.”

A number of additional restrictions apply to covered transactions:

• For certain non-depository creditors, roll-overs and vehicle title loans are prohibited.
• The covered borrower cannot be required to waive legal recourse under State or Federal law, submit to arbitration, or comply with “onerous” or “unreasonable” notice requirements.
• The covered borrower cannot be required to establish an allotment to repay the obligation and certain limitations apply to the use of checks or other methods of access to a deposit, savings, or other financial account maintained by the covered borrower.
• Prepayment penalties and restrictions on prepayment are prohibited.

1. Disclosure requirements

Creditors must also build systems and train their employees to provide certain written and oral disclosures.

1. Written disclosures

In addition to the applicable Regulation Z disclosures, a covered borrower must receive “a statement of the MAPR applicable to the extension of consumer credit” before or at the time the borrower becomes obligated on the transaction or establishes an account.

However, rather than providing the numerical value of the MAPR, the following or a substantially similar statement may be included in the agreement with the covered borrower:

Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit.  In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent.  This rate must include, as applicable to the credit transaction or account:  The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).

1. Oral disclosures

The creditor must also orally provide the above MAPR statement and a “clear description of the payment obligation” (such as a Regulation Z payment schedule or account-opening disclosure) either in person or through a toll-free telephone number included on the application form or in a written disclosure.

Military Lending Act Manley Williams

Spotlight on the Military Lending Act: Did the Final Rule Improve on the Proposal?

On July 22, 2015, the Department of Defense (“Department”) released its final rule amending the regulations that implement the Military Lending Act (“MLA”), which means that a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”) will now be subject to the MLA and its “all-in” 36% military annual percentage rate (“MAPR”) cap.

Specifically, the Department expanded the definition of “consumer credit” to be consistent with credit that is subject to the Truth-in-Lending Act (“TILA”)—credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.

In response to the initial proposed rule, financial services industry stakeholders undertook a substantial effort to show how proposed modifications to the MLA regulations were overly broad and, in parts, inconsistent with the Department’s mandate under the MLA.  At a high level, industry comment letters fell into five categories:

• The Department was asked to provide creditors with “a substantial time period” to implement the operational changes needed to comply with the regulation.
• The Department was asked to take a more targeted approach to redefining “consumer credit,” either by focusing exclusively on certain predatory loans or by excluding certain products (such as credit cards) entirely or narrowing the requirements for such products. A link to BuckleySandler’s comment letter in this regard can be found here.
• The Department was asked to exempt from the final rule certain institutions (such as all insured depository institutions).
• The Department was asked to exempt certain charges, such as application or participation fees, from the MAPR calculation.
• The Department was asked to broaden the safe-harbor methods for determining whether a consumer is a covered borrower.

The final rule largely rejected the requests and instead retains the approach in the proposed rule.  Three features stand out in this regard:

• The final rule tracks the proposed rule regarding how the regulation defines the “consumer credit” products to which it applies.
• The Department did not provide an exemption for insured depository institutions or insured credit unions.
• While credit card issuers were given until October 3, 2017 to come into compliance, the Department gave other creditors until October 3, 2016, which is only 12 months from the October 1, 2015 effective date, to comply with the final rule, as opposed to “at least 18 months,” which some commenters requested.

With that said, the final rule does contain some positive modifications that relieve onerous compliance burdens, including abandonment of the proposed requirement that a “bona fide” fee charged to a credit card account also be “customary.” These modifications are discussed below.

Modifications or requests that the Department denied

First, the Department rejected requests to change the scope of the definition of “consumer credit,” either by targeting only specific types or by excluding entirely certain types.  The Department stated that, in its view, a broad definition of “consumer credit” was preferable, in part, because expanding the scope of products subject to MLA compliance would “preserve access to a wide range of products” while protecting covered borrowers.  Next, the Department refused to exempt credit card accounts from the “consumer credit” definition because it determined that compliance with the CARD Act could not displace the benefits of the MLA.  The Department expressed concern that lenders could exploit such an exemption by transforming high-cost open-end products into credit cards, which do not have a maximum interest rate under the CARD Act.

Second, the final rule does not completely exempt insured depository institutions or insured credit unions.  Broadly speaking, the arguments for exemption included that (i) failing to provide exemption would lead to the exclusion of service members from credit products and services, and (ii) a robust regulatory and supervisory framework already exists for such institutions.  The Department responded that it was “confident that…[these institutions] could find appropriate methods to provide borrowers credit products that comply with the [MLA] interest-rate limit….”  Next, the Department rejected the notion that the robust regulatory and supervisory regime for insured depository institutions justifies an exclusion from the MLA because that regime was not designed to lower the costs of credit for covered borrowers.

Many commenters requested that the Department provide “a substantial period of time for compliance,” such as “at least 18 months,” because of the operational difficulties presented.  The Department stated that creditors need only a “reasonable period of time” to modify their operations.  Therefore, except for credit card accounts (discussed more fully below), creditors have only 12 months to comply with the requirements in the final rule.

Modifications or requests that the Department granted

In general, credit card issuers were the largest beneficiary of the Department’s modifications, notwithstanding that the Department declined to exempt credit card accounts from the final rule.  First, the Department granted a complete exemption from the definition of “consumer credit” for credit extended to a covered borrower under a credit card account for a minimum of two years.  The exemption expires on October 3, 2017.

Second, the final rule continues to provide a qualified exclusion for credit card accounts from the MAPR calculation for a “bona fide” fee, but it modified the proposed rule to eliminate the requirement that the bona fide fee be “customary.”  This provides relief from the operational difficulties and uncertainties associated with defining “customary,” and means that credit card issuers will have a wider berth for innovation in products and services without the risk of liability under the MLA insofar as fees could be deemed not “customary.”

Finally, the final rule included the following positive modifications:

• For insured credit unions and insured depository institutions, an application fee may be excluded from the computation of the MAPR for a short-term, small amount loan, subject to certain conditions.
• The Department adopted a new “covered borrower” safe harbor to permit a creditor to “legally conclusively determine” that a consumer is a covered borrower by using information obtained in a “consumer report from a nationwide consumer reporting agency or a reseller who provides such a report.” The final rule retains the original safe harbor—permitting creditors to “legally conclusively determine”  that a consumer is a covered borrower by using information obtained directly or indirectly from the MLA database—thereby giving creditors two safe-harbor options.
• Removed the “actual knowledge” clawback from the “covered borrower” safe harbor, meaning that a creditor who concludes that a borrower is not a covered borrower after conducting a covered-borrower safe-harbor check using either the MLA database or a permissible consumer report will not be liable even if the consumer is a covered borrower.

TILA Military Lending Act Manley Williams Valerie Hletko

DOD Proposes Expanded Coverage Of Military Lending Act Protections

On September 29, a proposed amendment to the U.S. Department of Defense’s regulation that implements the Military Lending Act (MLA) was published in the Federal Register, with comments due by November 28. Most importantly, the amendment expands the protections of the MLA by defining “consumer credit” to be consistent with closed- and open-end credit products already regulated under TILA, which would include all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. Currently, the MLA only applies to (i) closed-end payday loans up to $2,000 with a term of 91 days or fewer; (ii) closed-end auto title loans with a term of 181 days or fewer; and (iii) closed-end tax refund anticipation loans. However, the proposed regulation would continue to exclude residential mortgages and purchase-money loans for personal property from coverage, including motor vehicles. The MLA was passed in 2006 and provides active duty servicemembers and their dependents with, among other protections, a 36% interest rate cap, military-specific disclosures, and a prohibition on creditors against requiring the servicemember to submit to arbitration in the event of a dispute.

TILA Military Lending Act

CFPB Director Announces Indirect Auto Finance Proxy Methodology White Paper, Discusses Numerous Other Initiatives

On June 18, in an appearance before the House Financial Services Committee, CFPB Director Richard Cordray stated that later this summer the CFPB hopes to release a white paper on the proxy methodology it employs  to identify alleged discrimination in indirect auto financing. The white paper follows repeated attempts by members of the Committee to force the CFPB to reveal more details about its approach to indirect auto finance enforcement. Director Cordray also revealed that the CFPB is working on a white paper regarding manufactured housing finance.

The hearing covered numerous additional topics, some of which overlapped with those addressed during Mr. Cordray’s recent appearance before the Senate Banking Committee. Among the new issues raised before the House Committee, Mr. Cordray expressed openness to developing a limited advisory opinion process for the CFPB. In response to a question from Rep. Ed Royce (R-CA), Mr. Cordray explained that the CFPB regularly provides informal advisory opinions. He acknowledged other agencies’ use of advisory opinions and their potential benefit, and indicated that advisory opinions could be a useful tool for the CFPB on certain specific issues. Nevertheless, he resisted committing to the implementation of a formal advisory opinion process. The Committee recently approved, along party lines, legislation that would require the CFPB to establish an advisory opinion process.

In response to criticism from Rep. Denny Heck (D-WA) about the pace of an anticipated Military Lending Act (MLA) rulemaking, Mr. Cordray promised that the Department of Defense’s (DOD) proposal to revise the Military Lending Act regulations is nearly ready for submission to the OMB. The DOD recently released a report that previewed the forthcoming rulemaking.

Finally, Director Cordray also fielded a significant volume of questions regarding the CFPB’s collection and use of data, a continuing area of focus for the Committee’s Republican majority.

CFPB Auto Finance Military Lending Act Manufactured Housing

CFPB Director Announces Prepaid Card Rule Delay, Discusses Other Initiatives

On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.

Prepaid Cards

Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.”

Student Loans

Senator Menendez raised concerns about “automatic defaults” in the student loan context, an issue raised in the CFPB Student Loan Ombudsman’s mid-year report on student loans. In that report, the CFPB stated, based on an unidentified number of consumer complaints, that “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledged that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. Senator Mendendez described legislation to address the issue. Senator Brown (D-OH) also focused on student loan issues, picking up on the CFPB’s common refrain that problems in the student loans servicing market are similar to those seen in mortgage servicing. He called for the CFPB to establish student loan servicing standards. Director Cordray acknowledged that the two markets are different, but pointed to “poor customer service, problems with transfers, lack of information, and harm to consumers” as “eerie” examples of problems seen in both markets.

Small Dollar Loans

On small dollar loans, Senator Brown expressed concern that an eventual CFPB rule on traditional payday loans could lead to arbitrage and leave gaps in consumer protection related to other small dollar loans, including, for example, online loans, auto title loans, and installment loans. Director Corday described this issue as one of “extreme importance” as the CFPB addresses the small dollar loan market. He stated that implementation of the Military Lending Act has given rise to similar problems, which the CFPB is working with the Department of Defense to address. He explained that the CFPB’s process on a payday loan rule is taking longer as the Bureau attempts to deal with these issues, but believes “it's well worth a little additional time in order to make sure that what we do won't be made a mockery of by people circumventing it through just transforming their product slightly.”

Arbitration

Senator Warren (D-MA) turned her attention, which recently has focused on student loans, to the issue of arbitration. She stated that “arbitration stacks the deck against customers in favor of large corporations,” and that it is “no surprise that many big banks, and other big corporations, force customers to agree to arbitration clauses to get credit cards, or open checking accounts, knowing that this means that the customer will have no real remedy if things go wrong.” Director Cordray responded that in hearing from corporations and consumers on the issue of arbitration clauses, there is almost no relation between the two, which is contrary to CFPB’s experience on other issues. He explained that while the Dodd-Frank Act barred arbitration in mortgage contracts, he only directed the CFPB to study and consider interventions related to arbitration in other consumer finance contracts. He said the CFPB has pursued a very thorough process to conduct the required study, which the Director believes will be completed this year. Senator Warren pressed him to commit to new rules if the study presents evidence such rules are required. Director Cordray declined to describe any possible policy judgments or actions that could follow the study, but promised the CFPB will fulfill its obligation to engage in policymaking that appropriately reflects the conclusions of the study.

CFPB Payday Lending Arbitration Prepaid Cards Student Lending Installment Loans Military Lending Act Online Lending

DOD Report Previews Expansion Of Military Lending Act Regulations

Recently, the Department of Defense (DOD) published a report on the Military Lending Act (MLA), as requested in the House report that accompanied the fiscal year 2013 National Defense Authorization Act (FY 2013 NDAA). The MLA generally covers short-term, small dollar loans, including payday, car title, and refund-anticipation loans, but current DOD regulations exclude credit cards, overdraft loans, military installment loans, and all forms of open-end credit. Consumer advocates, state attorneys general, and others have called for the MLA regulations to be expanded to cover other products. The DOD report provides a summary of responses the DOD received in response to a 2013 advance notice of proposed rulemaking related to the potential expansion of the MLA regulations, and reviews state and federal policy developments, as well as changes in the markets for small dollar products. The DOD concludes that the MLA regulations need to be amended, but that simply extending the definition of covered credit products is not sufficient. The DOD is therefore “redrafting” the MLA regulations and plans to take a more “comprehensive approach” that could cover all short-term, small dollar credit products under the MLA regulations and provide exceptions as appropriate. Notably, the FY 2013 NDAA also clarified the CFPB’s enforcement authority under the MLA and granted the CFPB an opportunity to influence the content of the MLA regulations by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections.

CFPB Servicemembers Military Lending Act

CFPB Releases Snapshot of Servicemember Complaints

On March 6, the CFPB released a “snapshot” of servicemember complaints prepared by the Office of Servicemember Affairs (OSA), which analyzes the military consumer complaints received since July 2011. According to the report, servicemembers, veterans, and their families have submitted 14,100 complaints to the Bureau since its opening and have recovered more than $1 million. The volume of servicemember complaints has continued to increase over time, rising 148% from 2012 to 2013.

Notably, although “debt collection” was not added as a complaint category until July 2013, approximately 3,800 complaints received relate to collection practices. Nearly half of these complaints concern attempts to collect non-existent debts, with the remainder concerning improper collection tactics and procedural issues related to collection. The category that received the most complaints—approximately 4,700—was mortgage. Concerns raised relate primarily to practices undertaken when a borrower defaults, but also to loan origination and making payments. The remainder of the complaints received relate to consumer loans, private student loans, payday loans, credit cards, credit reporting, banking services, and money transfers. Along with debt collection practices, the report identifies payday loans—and specifically, compliance with the Military Lending Act's interest-rate restrictions—as a point of focus for OSA.

CFPB Servicemembers Consumer Complaints Military Lending Act