Client Alert: From the Scheer Law Group: New Regulations Amending the Military Lending Act. Prepare Now!!

Client Alert: From the Scheer Law Group:
Subject: New Regulations Amending the Military Lending Act, Starting October 3.  Be Prepared!!

( Disclaimer): The following bulletin refers to new regulations  subject to developing case law and regulatory oversight. In the event that you encounter issues covered in this bulletin, you should review the appropriate response with counsel experienced in this area of law and should update the status of any legislation, regulation or case law mentioned.. The intention of SLG is to give an overview of the subject covered and to highlight trends that are emerging, not to provide advice applicable to any particular case. No permission for the general public to use this Outline is granted by SLG

Overview. The ability to affect regulatory compliance in a cost-effective manner will likely make or break many lending institutions over the next few years. All lenders and servicers are feeling the pressure as activist regulatory agencies and covered lenders seek to strike a balance between consumer protection and the need to foster a  profitable lending environment that will allow consumers access to credit at a reasonable rate. The problem is that the regulations are coming from so many directions that it is hard to keep up and expensive to comply.

The new Military Lending Act (“MLA”) regulations regarding active duty military personnel and their dependents are a good example of this. The Service Members Civil Relief Act (“SCRA”) was thought to have been the answer to protecting active duty military and their dependents from the effects of default and the pressure of high loan payments during active military service. More protections were needed and now there is newly enhanced MLA.

Additional areas of concern  by regulators were found (particularly related to pay day loans, pawn broker loans etc.) that have spawned these new MLA regulations.  The perceived abuse of these lenders was a catalyst to also draw in and regulate traditional lenders such as banks and credit unions. These lenders will now also have to add compliance policies and procedures to cover much more closely any covered loans made to active duty military personnel or their dependents, or suffer the potential for voiding of their agreements and the imposition of civil and criminal penalties.  Fortunately, many loans are excluded. However, you must take the time to know which loans are covered .

The following is a brief outline, the requirements are technical. Please note the information in the footnotes. You must prepare now and must develop procedures to evidence the intent to comply.

New Regulations: Amended Military Lending Act (“MLA”). Generally effective October 3, 2016, regulation of credit card accounts by October 3, 2017. [1] [2] Note: Not the same as the SCRA.

• Coverage for Many More Consumer Credit Transactions. The changes to definitions of consumer credit in the final regulations bring any closed or open-end loan within the scope of the regulation, except for loans secured by a “residential mortgage” or a purchase-money loan, including a loan to finance the purchase of a vehicle.[3]  Note: A loan on vacant land or not secured by a dwelling would be covered.
• Covered Borrowers: Is a consumer who at the time of loan consummation become obligated on a covered transaction, is active duty military, or a covered dependent. [4]
• Examples Covered Borrowers: [5]
• A creditor can elect to assess whether a consumer is covered under the Act using the MLA database or relying on information contained in a consumer report obtained from a nationwide CRA. [6] Note: You cannot rely on the borrower’s statement.
• Restrictions on interest rates that can be charged (36%),  and mandatory disclosures include: written disclosures similar to Reg. Z and describing the Military Annual Percentage Rate [7], and oral disclosures describing the payment obligations. There are also limits  on a borrower’s waiver of rights, including SCRA rights.[8]
• Penalties include: Voiding the contract, misdemeanor criminal penalties, and civil penalties, including damages (including punitive damages when applicable). A lender can defend by showing that a breach was an unintentional error if it maintains procedures to avoid such errors.  [9]

Please call me if you would like to discuss

Spencer Scheer

[1] Final Rule amends regulations that implement 10 USC §987, which was enacted in section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007 (“2006 Act”),[FN21] and amended by sections 661-663 of the National Defense Authorization Act for Fiscal Year 2013 (“2013 Act”). See also 32 CFR 232.3.

[2] The regulations takes effect 10.1.16, but other than as provided in 32. CFR §232,12 and 232,13(b)(1), the new regulations  applies to loans that are extended to a covered borrower and consummated after October 2, 1016 . Compliance generally required on covered consumer credit consummated on or after 10.3.16 (See also 32 CFR §232.13).

[3] See 32 CFR §232.3.  The final rule extends the types of closed and open-end consumer credit products covered under the MLA to generally align with the definition of credit under TILA, including credit offered or extended to a covered borrower primarily for personal, family or household purposes, and that is subject to a finance charge or payable by a written agreement in more than four installments.

[4] See 32 C.F.R. § 232.3 (g)(1) Covered borrower means a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit, is a covered member (as defined in paragraph (g)(2) of this section) or a dependent (as defined in paragraph (g)(3) of this section) of a covered member.
(2) The term “covered member” means a member of the armed forces who is serving on—
(i) Active duty pursuant to title 10, title 14, or title 32, United States Code, under a call or order that does not specify a period of 30 days or fewer; or
(ii) Active Guard and Reserve duty, as that term is defined in 10 U.S.C. 101(d)(6).
(3) The term “dependent” with respect to a covered member means a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2).
(4) Notwithstanding paragraph (g)(1) of this section, covered borrower does not mean a consumer who (though a covered borrower at the time he or she became obligated on a consumer credit transaction or established an account for consumer credit) no longer is a covered member (as defined in paragraph (g)(2) of this section) or a dependent (as defined in paragraph (g)(2) of this section) of a covered member.

[5] See 32 C.F.R. § 232.2 (2) Examples—
(i) Covered borrower. Consumer A is a member of the armed forces but not serving on active duty, and holds an account for closed-end credit with a financial institution. After establishing the closed-end credit account, Consumer A is ordered to serve on active duty, thereby becoming a covered borrower, and soon thereafter separately establishes an open-end line of credit for personal purposes (which is not subject to any exception or temporary exemption) with the financial institution. This part applies to the open-end line of credit, but not to the closed-end credit account.
(ii) Not a covered borrower. Same facts as described in paragraph (a)(2)(i) of this section. One year after establishing the open-end line of credit, Consumer A ceases to serve on active duty. This part never did apply to the closed-end credit account, and because Consumer A no longer is a covered borrower, this part no longer applies to the open-end line of credit.

[6] See 32 CFR § 232.5, which provides two mechanisms for a creditor to unilaterally assess the status of a consumer who applies for consumer credit in order to make a legally conclusive determination that a consumer is not a covered borrower: The creditor may use information from the MLA Database or from a consumer report obtained from a nationwide consumer reporting agency. For either mechanism, the creditor may make a determination regarding a consumer-applicant’s status generally when the creditor enters into a transaction or establishes an account that is (or could be) consumer credit. Under either mechanism, a creditor must timely create and thereafter maintain a record of the information so obtained. (See Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 80 FR 43560-01).

[7]  See C.F.R.  32 CFR§ 232.4 for calculation of the  MAPA.

[8] 32 C.F.R. §§ 232.6 & 8.

[9] 32 C.F.R. § 232.9.