Military Lending Act Panel 1 Military Lending Act

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Military Lending Act Panel 1

Military Lending Act Panel 1

Military Lending Act New Obligations and Compliance Risks Nessa E. Feddis, American Bankers Association

Military Lending Act New Obligations and Compliance Risks Nessa E. Feddis, American Bankers Association Benjamin K. Olson, Buckley. Sandler Todd M. Hill, Financial Services Roundtable 2

General Overview • • MLA Background Restrictions on certain consumer loans Made to military

General Overview • • MLA Background Restrictions on certain consumer loans Made to military personnel, spouses, dependents 36% “military” APR cap Other prohibitions Written and oral disclosers Verification of military status through database or CRA 3

Background • Passed October 17, 2006 • Intended to remedy abusive practices associated with

Background • Passed October 17, 2006 • Intended to remedy abusive practices associated with payday lending and certain other loans identified in Do. D “Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents” 4

Background • Original amendment added on Senate floor only capped interest • Expanded in

Background • Original amendment added on Senate floor only capped interest • Expanded in conference to address specific concerns related to prior report • Little public debate, no hearings, and no input from committees with jurisdiction or regulatory agencies with relevant expertise 5

Background • Final rule: July 22, 2015 • Mandatory effective date: October 3, 2016

Background • Final rule: July 22, 2015 • Mandatory effective date: October 3, 2016 (2017 for credit cards unless Do. D changes) • Industry shortly thereafter approaches Do. D for clarifications • August-November 2015: Industry develops issues list • December 8, 2015: Industry meets, as Do. D directed, with banking agencies to discuss issues • March 15, 2016: Industry meets with Do. D 6

Background • April 7, 2016: Industry submits recommendations for changes to regulation • April

Background • April 7, 2016: Industry submits recommendations for changes to regulation • April 15, 2016: Industry submits rationale and process for adopting an “interim final rule” • June 23, 2016: Industry and Do. D meet • August 26, 2016: Do. D publishes interpretive rule in Federal Register 7

When Does the MLA Rule Apply? • MLA Rule applies even when the rate

When Does the MLA Rule Apply? • MLA Rule applies even when the rate does not exceed 36% • MLA Rule applies to: o Loans to a “covered borrower” o That are “consumer credit” 8

Who is a Covered Borrower? • Military personnel and their spouses and dependents o

Who is a Covered Borrower? • Military personnel and their spouses and dependents o May rely on Do. D database or CRA • “Covered borrower” is a “covered member” or a dependent of a covered member at the time the account is opened or the borrower becomes obligated on the loan o “Covered member” means a member of the armed forces serving on active duty under specified statutes o “Dependent” means a spouse, child under 21, dependent child in school under 23, incapacitated child, dependent parent or parent-in-law that resides in household, and certain person for whom the covered member is a legal custodian 9

What Loans are Covered? • Consumer credit • Subject to a finance charge or

What Loans are Covered? • Consumer credit • Subject to a finance charge or payable by written agreement in more than 4 installments 10

Exclusions Covered Loans • Residential mortgages, i. e. secured by a dwelling o condos,

Exclusions Covered Loans • Residential mortgages, i. e. secured by a dwelling o condos, mobile homes, boathouses o HELs • Purchase money loans that do not exceed purchase price • Loans (except student loans) greater than $54, 600 (per Regulation Z threshold) 11

Examples of Covered Loans • Overdraft lines of credit (but not overdrafts) • Personal

Examples of Covered Loans • Overdraft lines of credit (but not overdrafts) • Personal loans (open and closed-end) • Car and boat refinance • Credit cards • Student loans • Lot loans (requesting clarification from Do. D) 12

Prohibitions in Covered Loans • 36% “military APR” cap o All finance charges o

Prohibitions in Covered Loans • 36% “military APR” cap o All finance charges o Application and participation fees o Fees for “credit related ancillary products sold in connection with the credit transaction” o Credit insurance premiums or charge for single premium credit insurance o Fees for debt cancellation o Fees for debt suspension agreement 13

Prohibitions in Covered Loans • 36% “military APR” cap o “Effective” APR for open-end

Prohibitions in Covered Loans • 36% “military APR” cap o “Effective” APR for open-end credit such as overdraft lines of credit and credit cards • Because MAPR cannot exceed 36% in any billing cycle, systems must track and suppress fees o Zero balance rule: • If no MAPR can be calculated because no balance in billing cycle, no fee may be charged except “participation” fee not exceeding $100 per year (except bona fide credit card fee) • Do. D clarified fees not included in MAPR may be charged and • Fixed minimum and other fees except transaction fees may be charged 14

Prohibitions in Covered Loans • 36% MAPR cap: Special rule for credit cards o

Prohibitions in Covered Loans • 36% MAPR cap: Special rule for credit cards o Exclusion from calculation bona fide fees that are reasonable o “Reasonable” • Fees “typically imposed by other creditors for the same or substantially similar product or service” • Safe harbor: assumed to be reasonable if fees are less than or equal to average fee for “substantially similar” product charged by 5 or more of creditors with more than $3 billion outstanding 15

Prohibitions in Covered Loans • Prohibition against creditor “use of a check or other

Prohibitions in Covered Loans • Prohibition against creditor “use of a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower” o Means lender can’t accept a check or use automatic debit for payment o Effectively prohibits “liquid secured credit, ” loans secured by bank account • In response to industry requests Do. D clarified: o Covered borrowers may pay by check or recurring payments o Security interests are permitted in limited circumstances 16

Prohibitions in Covered Loans • Prepayment penalties • Arbitration “or other onerous legal notices

Prohibitions in Covered Loans • Prepayment penalties • Arbitration “or other onerous legal notices provisions in the case of a dispute” • Demands of “unreasonable notice from the covered borrowers as a condition of legal action. ” • Waivers of the right to legal recourse under any state or federal law including SCRA • Allotments to pay loan 17

Prohibitions in Covered Loans • What prohibitions do not apply to banks? o Prohibition

Prohibitions in Covered Loans • What prohibitions do not apply to banks? o Prohibition against using the title of a vehicle as a security for a covered loan o Prohibition against refinancing or renewing covered credit by the same creditor with the proceeds of other consumer credit 18

Disclosure Requirements Timing: “Before or at the time the borrower becomes obligated on the

Disclosure Requirements Timing: “Before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit” Content Statement of the MAPR • • Written Disclosures Oral Disclosures X X Not a numeric disclosure of MAPR value Standard language provided Regulation Z disclosures X “Clear description of the payment obligation” X • • X Closed-end payment schedule Open-end account-opening disclosures 19

Disclosure Requirements • In response to industry requests Do. D clarified: o Creditors may

Disclosure Requirements • In response to industry requests Do. D clarified: o Creditors may provide disclosures after account-opening for telephone transactions consistent with Regulation Z o “General descriptions” of the payment obligation, rather than the Regulation Z payment schedule or account-opening disclosure suffice 20

Military Status Determination • Bank may not rely on applicant statement • Safe harbor:

Military Status Determination • Bank may not rely on applicant statement • Safe harbor: o Use information “obtained directly or indirectly from the database maintained by the Department” o Use “statement…describing the status…contained in a consumer report obtained from a consumer reporting agency that compiles …files on consumers on a nationwide basis…” 21

Military Status Determination • When must the bank determine military status to enjoy the

Military Status Determination • When must the bank determine military status to enjoy the safe harbor? o When applicant applies to establish account or 30 days prior. o When applicant initiates a transaction or 30 days prior o When creditor develops or processes a “firm offer of credit” that includes status of the consumer so long as consumer responds to offer no later than 60 days after creditor provided offer. 22

Military Status Determination • Bank may check status after account is opened o Covered

Military Status Determination • Bank may check status after account is opened o Covered borrower excludes someone covered when account opened, but no longer covered o Regulation provides lenders may not obtain information from any Do. D databased to “ascertain whether a consumer had been a covered borrower as of the date of that transaction or…as of the date that account was established. ” o MLA database only has current information 23

Record Retention • “Record of the information obtained” o Screen shot from Do. D

Record Retention • “Record of the information obtained” o Screen shot from Do. D database o Copy of credit report • Retain for five years 24

Liability for Violations • • • Criminal penalties Private right of action and civil

Liability for Violations • • • Criminal penalties Private right of action and civil liability Arbitration unenforceable Costs of the action Regulation Z violation: A violation of Regulation Z involving any product covered by the regulation is also a violation of the MLA • Voidance of the contract o Requested that Do. D clarify contract not void solely because it includes: (i) a prohibited provision that expressly excludes covered borrowers; or (ii) a disclosure fails to conform with the applicable timing, content, or format requirements 25

Compliance Options • Deny the loan to covered borrowers • Conform the loan –

Compliance Options • Deny the loan to covered borrowers • Conform the loan – may not be feasible or practical • Offer separate product for covered borrowers • Eliminate or do not develop product 26

Verification of Military Status The final regulation prescribes two methods by which a creditor

Verification of Military Status The final regulation prescribes two methods by which a creditor or lender can conduct covered borrower checks and obtain a safe harbor protection for doing so: 1) MLA Database: The Defense Manpower Data Center’s MLA database system can be used to conduct covered borrower searches. The database is active. These searches, much like how they are conducted via the SCRA database, require the following fields of data: Ø DOB Ø SSN Ø Last Name 2) Military status report via a national credit reporting agency (NCRA): Equifax, Experian and Transunion will be offering military status reports upon query for such information. The military status report will be provided with a credit report for a fee. Stand-alone military status reports will eventually be available for a fee, perhaps by 10/3. o Under 18 dependent data will not be available via a NCRA report. ü This data can only be pulled from the database system via a direct web service connection, a direct query to the MLA database or via a request, for an additional fee, through a NCRA. 27

Verification of Military Status • A very limited third option is available for conducting

Verification of Military Status • A very limited third option is available for conducting covered borrower checks via a “direct web service” connection to the MLA database system o 15 enterprises, mostly financial institutions, have been granted direct web service connections with three additional direct web service connections allocated to the three NCRAs to conduct under 18 dependent searches. Experian and Trans. Union have established their direct connections with DMDC. Equifax has not. • NOTE: Self-Identification via a covered borrower statement, as currently prescribed by MLA, expires under the new regulation on October 3, 2016. Lenders and creditors “may elect” to use either of the prescribed methods for conducting a covered-borrower check to determine military status of customers and their dependents. The prescribed methods are those outlined in this presentation and outlined in the final regulation. 28

Verification of Military Status 29

Verification of Military Status 29

Verification of Military Status NCRA Testing and MLA Solution Rollout Milestones: • Each NCRA

Verification of Military Status NCRA Testing and MLA Solution Rollout Milestones: • Each NCRA (Equifax, Experian and Transunion) is allowing for financial institutions to test with both non-real data and real-data from DMDC today. Below are the current NCRA MLA solution production timelines: Ø Ø Ø EQUIFAX Currently offering a testing environment Phase 1 of MLA solution is released Targeting mid-Sept. for Phase 2 launch Ø Ø Ø EXPERIAN Currently offering a testing environment Phase 1 of MLA solution will launch on Sept. 9 Phase 2 launch is undetermined but likely after Oct. 3 Ø Ø Ø TRANSUNION Currently offering a testing environment Phase 1 of MLA solution will launch on Sept. 1 Phase 2 launch is undetermined but likely after Oct. 3 30

Verification of Military Status Current State of Play: • Industry technical implementation efforts are

Verification of Military Status Current State of Play: • Industry technical implementation efforts are behind schedule due to prolonged contract negotiations between Do. D and the NCRAs on the “push model. ” Ø Contracts were consummated between Do. D and the NCRAs only in mid-July after being projected to be completed in February of this year. • Industry technical implementation timelines are dramatically condensed because of prolonged contract negotiations between Do. D and the NCRAs, at great risk to the industry and to Do. D, in order to meet the Oct. 3 compliance effective date. Ø Condensed UAT and IT testing schedules. Ø Condensed training and education schedules across impacted business lines and with industry vendors. Ø Industry vendor solutions are behind schedule, if a solution has even been developed by some vendors. • Direct web service connectivity efforts are underway again after being halted due to prolonged contract negotiations between Do. D and the NCRAs on the “push model. ” Ø Unlikely that financial institutions granted a direct web service connection will have that connection available by the Oct. 3 compliance effective date. 31

Questions? 32

Questions? 32