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  • Special Alert: Department of Defense Issues Interpretive Rule Regarding Compliance with the Military Lending Act

    Consumer Finance

    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….”

    Click here to view the full Special Alert.

    * * *

    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.


    Military Lending Act Manley Williams Valerie Hletko Sasha Leonhardt Special Alerts

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

    Consumer Finance

    Sasha-LeonhardtWith 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

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  • Spotlight on Student Lending (Part 2 of 2): Lessons Learned from CFPB Reports

    Consumer Finance

    In 2012 and 2013, the Consumer Financial Protection Bureau released several major reports and held field hearings focused on private student lending and servicing. In addition to recent CFPB activity, on June 25, 2013, the Senate Banking Committee held a hearing regarding private student loans at which, among other witnesses, the CFPB’s Student Loan Ombudsman Rohit Chopra testified.

    The largest CFPB report, and the one most sweeping in scope, was the Bureau’s study of the private student loan market and characteristics of private student loans that was mandated by Dodd-Frank and issued in July 2012 (Private Student Loans Report). In addition, in October 2012, the Student Loan Ombudsman issued his Annual Report in which, among other things, he characterized the nature of the student loan complaints received through the CFPB’s student loan complaint portal up to that point (Annual Report of the Student Loan Ombudsman). Further, on May 8, 2013, the CFPB issued another report and held a field hearing focused on what it described as the “potential domino effect” of student loan debt on the broader economy and proposing several options to assist private student loan borrowers. Finally, testimony at the above-referenced Senate Banking Committee hearing focused largely on how to increase the low refinancing and modification activity in the private student loan (PSL) market. 

    Taken together the Bureau’s reports, field hearings, and Congressional testimony put student lenders and servicers on notice that the Bureau will be looking closely at servicing issues, including loan modification and debt collection practices, as well as fair lending and likely fair servicing issues going forward, i.e., consistency in loan modifications and work outs.

    With respect to the Private Student Loans Report, the report made clear that, in the fair lending space, the Bureau intends to scrutinize the use of cohort default rate (a statistic calculated by the Department of Education and used to determine which schools will be eligible to participate in federal student aid programs) as an eligibility metric. Likewise, the report recommends that lenders obtain school certification of the student’s education costs to prevent over borrowing.

    As for the Annual Report of the Student Loan Ombudsman, from the Bureau’s perspective, the report likely validates the agency’s growing concern over student loan servicing insofar as the three main areas of consumer complaints described in the report are all focused in that area:  general servicing concerns, concerns about payment processing, and concerns about inability to obtain loan modifications. The report draws parallels between problems in student loan servicing and those in mortgage loan servicing. For example, the report describes consumer complaints focused on the misapplication of payments, untimely error resolution and consumer difficulty in contacting appropriate personnel (all areas that have been a focus in the mortgage servicing space). So evident were the similarities in the eyes of the CFPB that its student loan ombudsman, Rohit Chopra, urged the Treasury secretary, the CFPB and secretary of education to consider whether mortgage servicing program “fixes” can be applied in the student loan context.

    To this end, the Bureau has been sharpening its focus on repayment options in the private student loan market, with signals pointing perhaps to possible new rules setting student loan servicing standards.  However, in the meantime, the Bureau has taken some notable steps.  First, on February 21, it issued a notice and request for information on policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.  Over 30,000 comments have been received.  In addition, on May 8, as mentioned earlier, the Bureau proposed several policy “solutions” to assist student loan borrowers, such as providing “refi relief” for borrowers who have made timely payments, providing a “road to recovery” for borrowers by allowing their loans to be restructured, and providing a “credit clean slate” for borrowers who satisfy the terms of a workout plan.  Importantly, though, the Bureau conceded that there are still significant accounting and operational impediments to implementing these “solutions” that require further consideration.

    In light of the Bureau’s reports, field hearings, and other public statements, we advise private student lenders focus now on tightening internal controls with respect to fair and responsible lending issues as well as servicing and debt collection practices as those will areas of primary focus by the Bureau in examinations and otherwise going forward.

    Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

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  • Spotlight on Student Lending (Part 1 of 2): Facing Increased Regulatory Scrutiny, Student Loan Lenders Prepare for CFPB Examinations

    Consumer Finance

    Currently, total outstanding student debt (both federal loans and private loans) has risen to roughly $1.1 trillion dollars. That figure represents an over 50% increase since 2008 and makes student loans the largest source of unsecured consumer debt – surpassing credit cards. At the same time, at least with respect to federal student loans, delinquencies have risen sharply during the same time period and, with unemployment rates for recent graduates still high by historic standards, the risk of continued high delinquency rates remains significant. Complicating matters is that student loan servicers, and servicers of private student loans in particular, have limited ability vis-à-vis a mortgage lender to modify those loans for borrowers in default.

    Not surprisingly, given this backdrop, borrowers have lodged complaints with the Consumer Financial Protection Bureau (CFPB or Bureau) focused on their inability to obtain loan modifications, concerns about improper payment processing, and concerns about servicers’ debt collection practices. All of these factors have prompted the Bureau to draw comparisons to the recent mortgage servicing crisis and to increase focus and attention on the student lending and servicing industry in an effort to stave off a problem of those proportions.

    In addition, the Bureau has focused its attention within student lending and servicing on other, more traditional areas of regulatory concern.  For example, the Bureau in the past year indicated it intends to closely scrutinize student lenders on fair lending issues – especially the use of non-credit bureau attributes such as cohort default rate – as well as unfair, deceptive, or abusive trade practices.

    For non-bank private student lenders, regulation by the CFPB represents a significant increase in the type of regulatory scrutiny to which lenders have traditionally been subject.  Even for large bank student lenders, which have long been subject to examinations by their prudential regulators, CFPB regulatory oversight will present new challenges insofar as the Bureau’s focus is solely on consumer protection and compliance and it has made clear that understanding and regulating private student lending is one of its high priorities.

    Here are several steps that student lenders and servicers can take now to proactively mitigate risk in the current environment, including:

    1. Developing, implementing and, as applicable, updating fair and responsible lending programs (including training of key employees in this area)
    2. Conducting periodic fair lending and UDAAP risk assessments
    3. Conducting gap analyses of collections and servicing practices to ensure compliance and CFPB readiness

    It bears emphasizing that the future likely holds increased regulatory scrutiny, especially from the Bureau and especially in the area of student loan servicing and debt collection. Private student lenders will also see increased scrutiny with respect to fair and responsible lending compliance, including their use of non-credit bureau attributes in underwriting and pricing and their marketing practices, e.g., how borrowers are solicited and whether a lender uses different marketing efforts based on loan products, such as those specific to a particular major, school, or geography.

    In December 2012, the Consumer Financial Protection Bureau released their student loan examination procedures, and since doing so, has commenced several examinations of bank and non-bank private student lenders. Lenders will have to show compliance with a variety of federal laws applicable at various stages (called modules) of the lending process and will be examined for potentially unfair, deceptive or abusive acts and practices.

    The procedures indicate that exams will be composed of several modules:

    1. Advertising, marketing and lead generation
    2. Application, qualification, loan origination, and disbursement
    3. Repayment and account maintenance
    4. Customer complaints
    5. Collections and credit reporting
    6. Information sharing and privacy

    The CFPB’s examination personnel will review the lender’s organizational documents and process flowcharts, board minutes, annual reports, management reports, policies and procedures, rate and fee sheets, loan applications, account documentation, notes and disclosures, file contents, operating checklists and worksheets, computer system details, due diligence and monitoring procedures, lending procedures, underwriting guidelines, compensation policies, audit reports and responses, training materials, service provider contracts, advertisements, and complaints. Examiners may also interview the lender’s personnel and observe customer interactions.

    Examiners will review potential legal and regulatory violations in modules roughly corresponding to the processes by which education loans are developed, marketed, originated and serviced, and the processes for handling consumer complaints, delinquencies and defaults, credit reporting and privacy protection. The examination process is intended to help the CFPB determine whether consumer financial protection laws have been violated and, if so, whether supervisory or enforcement actions are warranted.

    BuckleySandler advises student lenders to prepare for a CFPB exam by carefully reviewing the Bureau’s examination procedures, reports, and other public statements concerning student lending and servicing. We also recommend conducting a gap analyses between those materials and existing policies and procedures, and as appropriate, filling any identified gaps.

    Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB UDAAP Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

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