Military Lending Act Amendments Effective: 10/03/2016 - Loans and Open-end lines Presented by: Pam Perdue EVP Regulatory Insight, Continuity 10/03/2017 - Credit cards Presented September 2016
Presenting Today Lori Peterson, CRCM Director, Regulatory Infrastructure 15 years as an independent compliance consultant Former OTS examiner Oversees Tools Library 2
Agenda
Agenda MLA or SCRA? Summary of the amendments Covered loans/covered borrowers MAPR Disclosures required Enforcement provisions Implementing the rule Impact of the rule 4
MLA or SCRA?
MLA or SCRA?? MLA SCRA 6
MLA or SCRA? Military Lending Act (MLA) Servicemember is already on active duty when loan is originated Consumer-purpose loans only Real estate loans are not covered Servicemembers Civil Relief Act (SCRA) Servicemember is activated during the term of an existing loan Consumer- and business-purpose loans Real estate loans are covered MAPR cannot exceed 36% Interest rate must be lowered to 6% Initial disclosures required Notice required for past-due mortgage loans 7
Summary of the rule
Summary Current Rule Applies to: Payday loans < 91 days, under $2,000 Vehicle title loans < 181 days Tax refund anticipation loans MAPR cannot exceed 36% Covered Borrower Statement Statement of Federal Protections Numerical MAPR and total fees Standard TILA disclosures Effective 10/3/2016 (loans and lines); 10/3/2017 (credit cards) Applies to: All consumer loans (open- and closed-end) except: Residential (dwelling-secured) mortgages Purchase money vehicle or personal property loans Credit cards No change; must be calculated for each billing cycle for open-end products, including credit cards To obtain safe harbor, borrower status must be determined via either: MLA Database, or Consumer credit report Statement of MAPR Description of the payment obligation Standard TILA disclosures 9
Summary Military Annual Percentage Rate (MAPR) cannot exceed 36% At origination of closed-end loan During any billing cycle for open-end lines and credit cards Disclosures required: Statement of the MAPR (both orally and in writing) Description of payment obligation (both orally and in writing) Standard Truth-in-Lending disclosures (in writing) May not require consumer to submit to arbitration May not impose a prepayment penalty 10
Summary May not use access to an account to collect payments Examples of such access are remotely created checks and postdated checks Right of setoff is permitted The covered borrower s deposit account may be used to secure the loan We recommend that you seek advice and further guidance from your legal counsel on the contents of your loan documents as well as your procedures for these types of loans to ensure that they comply with the MLA s payment method restrictions and any state-specific requirements that may be more restrictive than the MLA. 11
Summary If a standard loan agreement is used for all consumers and it includes any prohibited provisions (i.e. arbitration requirement or a prepayment penalty), a savings clause must be included, limiting these requirements to only non-covered borrowers. 12
Covered loans
Covered loans With some exceptions, the MLA applies to open- and closed-end consumer purpose loans (effective 10/3/2016) and credit cards (effective 10/3/2017) to a covered borrower if the loan or account is: Subject to a finance charge, or Payable in more than 4 installments. 14
Examples of covered loans The following are examples of covered loans: Unsecured personal loan/line of credit Loan secured by title to an already-owned vehicle Loan secured by the covered borrower s deposit account Loan secured by a vacant lot, unless the loan proceeds will be used to construct a dwelling on the land that secures the loan. 15
Exceptions The MLA does not apply to: Residential mortgage loans (secured by a 1-4 unit dwelling) Loans expressly to purchase a motor vehicle if the vehicle secures the loan (no additional funds may be advanced above the purchase price) Loans expressly to purchase personal property if the personal property secures the loan (no additional funds may be advanced above the purchase price) Loans that are exempt from Regulation Z coverage Loans to non-covered borrowers 16
Covered borrowers
Covered borrowers The MLA applies to: Servicemembers who are on active duty when the loan is originated or the account is opened (if the call or order specifies a period of more than 30 days) Dependents of the active duty servicemember MLA coverage ends when the servicemember s active duty ends. You are not required to monitor the borrower s status during the life of the loan. 18
How to determine borrower status The MLA does not require a specific method... Determination method Ask the consumer Rely on Covered Borrower Statement Search the MLA database (https://mla.dmdc.osd.mil/) Rely on information in a consumer credit report Safe harbor provided? No No Yes (documentation must be retained) Yes (documentation must be retained...but if you do not use one of the safe harbor methods and make a covered loan to a covered borrower without complying with the MLA, you are in violation. 19
How to determine borrower status To receive safe harbor: Status must be determined via either the MLA database or a credit report The consumer s status must be checked: No more than 30 days prior to the date of the transaction or the date the consumer applies to establish an account; No more than 60 days prior to a firm offer of credit being provided to a consumer and to which the consumer has responded (if the consumer doesn t respond within 60 days, a new determination must be performed); Whenever a new account is established for the covered borrower, AND Documentation of determination of the borrower s status must be retained. 20
How to determine borrower status You may not access the MLA database after a loan is originated or an account is opened for the purpose of determining whether the consumer WAS a covered borrower. However, you may access the database during the term of the loan or account to determine whether the consumer continues to be covered. 21
How to determine borrower status 22
Example of a completed determination 23
Does the MLA apply? Covered loan + Covered borrower = the MLA applies 24
The MAPR
How to calculate the MAPR The math is exactly the same as calculating an APR...but more fees are included! 26
For open-end accounts with no balance, a participation fee may be imposed but may not exceed $100 per year (except for credit cards). No other fees required to be included in the MAPR may be imposed during a zero-balance billing cycle. See our Support Center article A minimum interest charge on a credit card account is not a periodic rate and therefore may be excluded from the MAPR.
Short-term, small amount loans Application fees can be excluded from the MAPR for short-term, small amount, closed-end loans that meet the following conditions: The loan must be made in accordance with a Federal law (other than the MLA) that limits the interest rate that may be charged; and The interest rate limitation in that law must be comparable to a limitation of 36 percent. The law must contain: a fixed numerical limit on the loan term, which may not exceed 9 months, and a fixed numerical limit on any application fee that may be charged to a consumer who applies for such a loan. 28
Short-term, small amount loans Only the Federal Credit Union Act currently includes such a law (Payday Alternative Loans). Therefore, at the present time, banks may not exclude application fees from the MAPR for short-term, small amount loans. However, if a law is enacted in the future that applies to banks, then the exclusion would apply. In order to be excluded from the MAPR under the PAL exemption, an application fee may only be charged once in a rolling 12-month period to the same borrower, either on the same loan or on a different short-term, small amount loan. If the same borrower is charged more than one application fee in the 12-month period, these fees must be included in the MAPR calculation. 29
When to calculate the MAPR Closed-end loans: MAPR must be calculated when loan is originated Open-end lines and credit cards: MAPR must be calculated for each billing cycle 30
When would the MAPR ever be more than 36%?? Loan amount Interest rate Term MAPR $1,500 6% 6 months 38.73% $1,500 6% 12 months 23.64% MAPR includes: $100 application fee $ 20 credit report fee $ 25 wire fee If the MAPR exceeds 36%, rate or fees may be reduced or waived to get MAPR down to 36% or lower. 31
Credit card fees The following can be excluded from the MAPR calculation for credit cards as long as they are bona fide and reasonable: Participation fee Application fee Transaction-based fee Similar fees connected to the use of the card (other than a periodic rate) 32
What is bona fide and reasonable? (applies to credit cards only) To determine whether a fee is bona fide and reasonable, you must compare the fee to: an average amount for a substantially similar fee charged by 5 or more creditors each of whose U.S. credit cards in force is at least $3 billion in an outstanding balance...at any time during the 3-year period preceding the time such average is computed. Continuity will be developing a new Tool to help you determine whether a specific credit card fee is bona fide and reasonable. This Tool will be available prior to the 10/3/2017 credit card implementation date. 33
What is bona fide and reasonable? (applies to credit cards only) This means that you must: Identify at least 5 credit card issuers who had at least $3 billion in outstanding credit card balances in any of the last 3 years ((Call Report information, Schedule RC-C Part I line 6(a)); Determine how much each of those issuers charges for the specific fee being considered (may be available on issuers websites); Average the fees; and Compare the average to the fee you charge. If your fee is the same as or lower than the average of the fees charged by the other issuers, then your fee would be considered to be bona fide and reasonable. 34
What is bona fide and reasonable? (applies to credit cards only) Instead of identifying other issuers and calculating average fees yourself, the DoD s interpretive rule clarifies that you may rely on information sources compiled in commercial available databases or other industry sources in making safe harbor calculations. 35
What is bona fide and reasonable? (applies to credit cards only) Reasonableness of a Participation Fee A participation fee may be considered to be reasonable if the amount reasonably corresponds to: The credit limit in effect or credit made available when the fee is imposed; The services offered under the credit card account, or Other factors relating to the credit card account. For example, even if other creditors typically charge $100 per annum for participation in credit card accounts, a $400 fee nevertheless may be reasonable if (relative to other accounts carrying participation fees) the credit made available to the covered borrower is significantly higher or additional services or other benefits are offered under that account. 36
What is bona fide and reasonable? If any fee charged on a credit card is determined not to be bona fide or reasonable, then all fees must be included in the MAPR, even those that are bona fide and reasonable. 37
Disclosures
Disclosures You must provide, either before or when the consumer becomes obligated for the loan or the account is established: A Statement of the MAPR that shows the charges that may be imposed; and A description of the payment obligation (this can be accomplished via a payment schedule or account-opening disclosure). Disclosures must be provided both orally and in writing (in a form the borrower can keep). There is no requirement that the oral and written disclosures of the payment obligation be identical. You may establish a toll-free number that consumers can use to receive the disclosures (this number must appear on either the application form or be provided with the statement of MAPR). 39
Disclosures The rule provides model language for the Statement of MAPR: 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). 40
Disclosures The DoD s interpretive guidance clarifies that the oral description of the consumer s payment obligation may be general, rather than specific to the consumer s actual loan terms. For example, you may choose to orally provide: A general description of how the payment obligation is calculated, An estimate of the consumer s payment obligation based on an estimate of the amount the consumer may borrow, How minimum payments are calculated on open-plans you issue, and then refer the consumer to the written materials that will be provided when the plan is opened, or A description of the borrower s obligation to make monthly, bi-monthly, or weekly payments, according to the borrower s agreement. 41
Disclosures The Statement of MAPR is not required to be included in advertisements. New disclosures are required if a covered loan is renewed or refinanced and is considered to be a new loan under Regulation Z. If two or more creditors are involved in the transaction, only one of them is required to provide the disclosures. The creditors may decide who is going to be responsible for this. 42
Enforcement provisions
Enforcement provisions The rule adds language to reflect the civil liability provisions for violation of the Act: Any actual damage sustained as a result, but not less than $500 for each violation; Appropriate punitive damages; Appropriate equitable or declaratory relief; Any other relief provided by law; and Costs of the action, including attorney fees as determined by the court. 44
Enforcement provisions (c) Contract void. Any credit agreement, promissory note, or other contract with a covered borrower that fails to comply with 10 U.S.C. 987 [the MLA] as implemented by this part or which contains one or more provisions prohibited under 10 U.S.C. 987 as implemented by this part is void from the inception of the contract. 45
Implementing the rule
Implementation plan - Analyze How will the amendments impact your organization? What risks does this rule present? Make sure the Board and senior management are aware of the rule s impact. Which covered loan types do you offer? Which roles within the institution will be affected? 47
Implementation plan - Analyze Will systems changes be required? For example, to: Calculate MAPRs for closed-end loans; Calculate MAPRs for each billing cycle on open-end loans and credit cards and waive fees if MAPR exceeds 36%; Produce Statement of MAPR; Ensure that loan and credit card agreements do not include arbitration clauses or prepayment penalties; and Allow coding of covered loans for future reference. 48
Implementation plan - Analyze Are third-party service providers affected? For example, Loan servicers; Credit card servicers; Core system provider; Loan origination system provider; Online loan/credit card application provider; or Forms providers. 49
Implementation plan - Analyze Which documents will need to be changed? For example, Disclosures; Loan and credit card agreements; Related loan policies; Written operating procedures; Loan origination checklists; Monitoring/auditing checklists; and Staff training materials 50
Implementation plan - Design Who will be responsible for managing implementation? Who will be responsible for completing required action steps (software updates, training, writing new procedures, testing) What are the deadlines for these action steps? Decisions: What method(s) will you use to identify covered borrowers? Will you continue to offer add-on products, which could cause the MAPR to exceed 36 percent? Will you need to revise application forms, account opening disclosures, fee schedules, advertising/marketing materials (including on your website)? Will you establish a toll-free number to provide required disclosures? 51
Implementation plan - Develop Write new procedures Work with affected third-party service providers Update software systems Develop training materials and schedule trainings with affected staff and third parties Revise quality control, monitoring, and auditing programs 52
Implementation plan - Test and Train Test Processes Software systems - create sample documents using all channels - be sure to test online processes. Verify that calculations are accurate. Create sample disclosures and check for accuracy. Correct any identified problem areas. Train All affected staff needs to be trained. 53
Impact of the rule
Impact of the rule - Risk Offering the covered products involves compliance, operational, reputational, and market risks. When performing your assessment for these products, you should consider the following: Compliance - Procedures for ensuring that covered borrowers are identified; MAPR calculations are accurate; required disclosures are provided; and third-party providers will comply. Operational - Ability to correctly calculate and adjust MAPR each billing cycle for open-end lines and credit cards; coding of loans for monitoring and tracking purposes. Reputational - If you will stop offering some products, your reputation in the community could be impacted. Market - If you will reduce rates and/or fees on products you offer to avoid 36% MAPR, consider impact on earnings. 55
Impact of the rule - Policy If you will change your product offerings, your policies will need to be updated to include: Descriptions of the products offered. Any specific criteria or limitations imposed by the Board. If your policies include references to specific rules and regulations, you will need to update them to include the Military Lending Act s requirements. 56
Impact of the rule - Procedures When updating procedures, you should include: Determining whether the loan is covered under the MLA Identifying covered borrowers (how to?) Calculating MAPR, fees to be included Resolving a MAPR that exceeds 36 percent Providing required disclosures Coding covered loans so that they can be identified for reporting and tracking purposes Ensuring that covered loans do not include arbitration clauses or prepayment penalties Determining whether credit card fees are reasonable Monitoring of the MAPR on open-end lines and credit cards for each billing cycle 57
Impact of the rule - Audit With the required procedural updates you ll need to update your quality checks, monitoring & audit work steps accordingly. When updating auditing/monitoring work steps, you should include a review of compliance with regulatory requirements and internal policies and procedures covering: The types of covered loans offered and any specific Board mandates Methods used to Identify covered borrowers MAPR calculations (including calculating for each billing cycle for open-end lines and credit cards) Providing required disclosures Arbitration clauses or prepayment penalties (prohibited in loans to covered borrowers) Oversight of third party providers Appropriateness of staff training 58
Impact of the rule - Technology You should generate test loans and verify that: Your LOS correctly calculates the MAPR The required Statement of MAPR and description of the payment obligation are generated for new loans You will also need to confirm that your system can accurately calculate MAPRs for each billing cycle for open-end lines and credit cards to covered borrowers, and make appropriate adjustments if MAPR exceeds 36 percent in any cycle. 59
Thank you!