Source: https://www.consumercomplianceoutlook.org/2017/second-issue/servicemember-financial-protection-an-overview-of-key-federal-laws-and-regulations/
Timestamp: 2019-04-24 10:02:22+00:00

Document:
High-cost credit and the resulting debt burden can have serious adverse consequences for members of the armed services and their families, according to the U.S. Department of Defense (DOD).
Interagency guidance regarding mortgage servicing practices for military homeowners with permanent change of station orders.
The article also reviews effective compliance management measures that financial institutions can adopt to ensure that appropriate financial protections are afforded to servicemember customers and their dependents.
The federal statutory framework for protecting servicemembers for consumer financial products and services consists of the MLA and the SCRA. The information in this section discusses highlights of each law and clarifies significant differences between them.
Both the MLA and the SCRA focus on protecting the financial interests of servicemembers and their dependents but differ in their scope. The MLA provides protections to servicemembers and their dependents for credit extended while the servicemember is serving on active duty. In contrast, the SCRA protects servicemembers and their dependents with obligations incurred prior to entry into active duty.
The MLA was enacted in 2006 with the goal of protecting active duty military personnel, including those in the active National Guard or Reserve, as well as their spouses and other dependents, engaged in consumer credit transactions.3 Notably, the MLA limits the cost of covered transactions, which are subject to a Military Annual Percentage Rate (MAPR) cap of 36 percent.
The DOD has rulewriting authority to implement the MLA and originally issued a final rule in 2007.4 This rule applied solely to three closed-end credit products: payday loans for no more than $2,000 and with a term of 91 days or fewer, motor vehicle title loans with a term of 181 days or fewer, and tax refund anticipation loans.
In July 2015, the DOD amended the MLA regulations, considerably broadening the types of consumer credit products within the scope of its coverage.5 Explaining that “the narrowly defined parameters of the credit products regulated as ‘consumer credit’ under [the 2007 rule] do not effectively provide the protections intended to be afforded to Service members and their families under the MLA,” the DOD expanded the scope of the MLA regulation generally to apply to most types of credit covered under the Truth in Lending Act (TILA) and Regulation Z.6 However, consistent with the MLA statute, the 2015 final rule continues to exempt home-secured credit and loans to finance the purchase of motor vehicles and other consumer goods that are secured by the purchased item.7 Accordingly, under the 2015 final rule, most credit products within the scope of TILA and Regulation Z are subject to MLA protections, including credit cards, deposit advance products, overdraft lines of credit,8 and certain installment loans.
Consumer credit that was extended and consummated between October 1, 2007, and October 3, 2016, is subject to the 2007 regulation. The compliance date for the 2015 final rule was October 3, 2016, except for credit card accounts, for which the compliance date is October 3, 2017.12 Aspects of the MLA regulation are discussed here in more detail.
The protections in the MLA regulation apply to consumer credit extended to a covered borrower. As noted, the MLA regulation’s definition of consumer credit was significantly broadened in 2015 and now aligns more closely with the definition of the same term in Regulation Z. Specifically, consumer credit is defined as “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.”13 Also, the MLA exempts home-secured credit and loans to finance the purchase of motor vehicles and other consumer goods that are secured by the purchased item.
A covered borrower is a covered member of the armed forces, or a dependent of a covered member, who becomes obligated on a consumer credit transaction or establishes an account for consumer credit.14 Under the MLA, covered members of the armed forces include members of the Army, Navy, Marine Corps, Air Force, or Coast Guard currently serving on active duty pursuant to Title 10, Title 14, or Title 32 of the U.S. Code under a call or order that does not specify a period of 30 days or fewer, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 U.S.C. §101(d)(6).
If a consumer opens a credit card account when the consumer is not a covered borrower, the account is not covered under the MLA even if the consumer later becomes an active duty servicemember. If a consumer opens a credit account while a covered borrower but later ceases active duty, the account is no longer subject to the MLA.
For covered consumer credit transactions, the MLA and its implementing regulation limit the amount a creditor may charge, including interest, certain fees, and charges imposed for credit insurance, debt cancellation and suspension, and other credit-related ancillary products sold in connection with the account or transaction. The total charge, as expressed through the MAPR,17 may not exceed 36 percent.18 The MAPR includes charges that are not included in the finance charge or the annual percentage rate (APR) disclosed under TILA.
For consumer credit card accounts under an open-end credit plan (not home-secured), certain fees are not required to be included in the MAPR calculation, provided that the fee is both bona fide and reasonable in amount.22 In assessing whether a bona fide fee is reasonable, the fee must be compared with fees typically imposed by other creditors for the same or a substantially similar product or service.23 For example, when assessing a bona fide cash advance fee, that fee must be compared with fees charged by other creditors for transactions in which consumers received extensions of credit in the form of cash or its equivalent. The MLA regulation also provides a safe harbor standard for determining a “reasonable” amount of a bona fide fee for a credit card account.24 There is no exclusion for “bona fide fees” for accounts that are not credit card accounts.
However, the regulations protect against civil liability if a creditor is able to demonstrate by a preponderance of evidence that an MLA violation was unintentional and resulted from a bona fide error.33 Particularly in light of the negative attention that improper treatment of servicemembers typically attracts, MLA noncompliance can also result in significant reputational harm for a creditor.
Commissioned officers in active service of the Public Health Service (PHS) or the National Oceanic and Atmospheric Administration (NOAA).
Searching the DOD’s Defense Manpower Data Center site at https://scra.dmdc.osd.mil with the appropriate certificate.
The 6 percent interest rate reduction broadly applies to any obligation or liability and would include, among other credit types, mortgages; home equity loans; automobile, boat, and other vehicle loans; credit cards; and student loans.
If a servicemember pays rent on a monthly basis, once he or she gives proper notice and a copy of his or her military orders, the lease will terminate 30 days after the next rent payment is due.
While in military service, the servicemember executes the lease and subsequently receives military orders for a PCS to a location outside the continental United States or from a location outside the continental United States to any other location, or for a deployment with a military unit for a period of 180 days or more.
Financial institutions should build effective compliance management systems to ensure that appropriate financial protections are provided to servicemember customers and their dependents.
Financial institution management should consider maintaining written policies and procedures approved by the institution’s board of directors that outline the steps for staff to follow when responding to requests for financial services from a servicemember or a servicemember’s dependents,as applicable. The institution’s policies would clearly state where a request is routed, who reviews it and authorizes benefits, and who communicates the decision to the borrower about the request. These procedures could either be stand- alone or incorporated into existing broader procedures.
Active duty military personnel make permanent change of station (PCS) moves approximately every two to four years.53 A PCS is the official relocation of an active duty military service member — along with any family members living with him or her — to a different duty location, such as a military base. For military homeowners, PCS orders that are nonnegotiable and operate under short timelines present unique challenges. Despite these challenges, military homeowners with PCS orders remain responsible for honoring their financial obligations, including their mortgages.
Communicate in a timely way the servicer’s decision regarding requests for assistance from homeowners with PCS orders and include an explanation of the reason for a denial, where required, to provide the homeowner an opportunity to address any deficiencies.
Mortgage servicers can support their efforts to follow this guidance by training employees about the options available for homeowners with PCS orders and adopting mortgage servicing policies and procedures that direct appropriate employee responses to servicemembers requesting assistance.
Regarding the MLA, financial institutions should have appropriate policies and procedures in place, for example: to identify covered borrowers; meet disclosure requirements; calculate the MAPR for closed-end, credit card, and other open-end credit products; and review consumer credit contracts to avoid prohibited terms.
Policies and procedures, for example, should indicate that employees are to provide covered borrowers with a statement of the MAPR, any disclosure required by Regulation Z, and a clear description of the payment obligation before or at the time that a borrower becomes obligated on a consumer credit transaction or establishes a consumer credit account. The procedures would also detail the written and oral methods by which the disclosures are to be delivered.
Financial institutions are also encouraged to establish appropriate policies and procedures to calculate the MAPR for closed-end and open-end credit products (including credit card accounts) so that the charges and fees that must be included and those that may be excluded are accounted for appropriately. Financial institutions would also do well to adopt change management policies and procedures to evaluate whether any contemplated new fees and charges would need to be included in MAPR calculations before these new fees or charges are imposed. Additionally, financial institutions should consider how their staffs may effectively monitor the MAPR in connection with open-end credit products and whether to waive fees or charges, either in whole or in part, to reduce the MAPR to 36 percent or below in a given billing cycle or alternatively not impose fees and charges in a billing cycle that are in excess of a 36 percent MAPR (even if permitted under the applicable credit agreement).
Other best practices may include developing an inventory of products and services offered to servicemembers and their dependents — and potentially developing products and services specifically intended for servicemembers and their dependents, taking into account MLA limitations and MAPR requirements.
When a servicemember submits a request for an interest rate reduction on any loan covered under the SCRA, for example, procedures would clearly state how employees are to reduce the interest rate on qualified loans. The procedures would include instructions on how to adjust the rate retroactively to the first day of eligibility and how to code the loans to adjust the periodic payments appropriately.
Although not required, a financial institution may want to consider searching for and flagging any additional loans that may qualify for coverage once a servicemember requests an interest rate reduction under the SCRA. Even if the servicemember does not request relief on additional loans at that time, it could be more expeditious for the financial institution to address all loans at the same time.
Additionally, policies and procedures regarding collections, mortgage foreclosures, and repossession of motor vehicles and other personal property would ideally address servicemember protections. Before initiating a foreclosure on a home or repossession of a vehicle or other personal property, the financial institution should determine whether the property is owned by a servicemember. The institution’s policies would provide its personnel with guidance on how to determine ownership.
Foreclosures and repossessions can be lengthy processes, so financial institutions are encouraged to determine whether a borrower qualifies as a protected servicemember several times during the process. For example, in addition to performing an initial determination before beginning a foreclosure, institutions should redetermine the military service status prior to finalizing the foreclosure or repossession. Further determinations may be warranted for more protracted proceedings.
Financial institutions should provide regular training for all of their employees on servicemember protections. Personnel extending and servicing credit-related products and services should understand an institution’s compliance obligations associated with servicemembers and their dependents and financial institution personnel’s role in ensuring effective compliance.
The financial institution’s quality assurance and audit staff should conduct regular reviews of the institution’s compliance with servicemember financial protection requirements. Internal review or audit findings that report any policy exceptions should be communicated to the institution’s board of directors and senior management for tracking and correction.
The financial institution’s customer information system (CIS) can be one of its most effective tools to facilitate identification and monitoring of customers eligible for protections under the MLA and/or the SCRA. CIS records flagged as servicemember or servicemember dependent, along with duty status dates, can inform staff tracking and management reporting to ensure that accounts associated with those customers are afforded appropriate protections.
The financial institution’s service provider risk management program should encompass consideration of compliance with servicemember financial protections. The service provider risk management program can vary based on the scope and nature of the institution’s outsourced activities. But the financial institution’s management should ensure that its service provider risk management program extends to any activities that provide financial services to servicemembers or their dependents, as applicable.
In evaluating a financial institution’s compliance management practices to confirm that it adequately addresses servicemember financial protections, the institution’s management should consider each of the previously mentioned elements of a compliance management system.
Notably, with the October 3, 2017, compliance date for new MLA rules applicable to credit card accounts, financial institutions would be well advised to leverage their existing compliance management system’s strengths while adapting MLA-specific policies and procedures, employee training, internal controls, and management information systems to comply with the amended MLA regulation.
Specific issues and questions should be raised with your primary regulator.
1 U.S. Department of Defense. Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents. August 9, 2006, http://download.militaryonesource.mil/12038/MOS/Reports/ReportonPredatoryLendingPractices.pdf.
2 This section is intended to highlight certain key provisions of the MLA and its implementing regulation; however, it is not intended to provide an exhaustive summary.
4 The MLA implementing regulation is found at 32 C.F.R. part 232.
5 80 Fed. Reg. 43560 (July 22, 2015); the DOD has also published an interpretive rule providing additional background information regarding compliance with the amended regulation. 81 Fed. Reg. 58840 (August 26, 2016).
6 79 Fed. Reg. 58602, 58610 (September 29, 2014); see also 15 U.S.C. §1601 et seq. (TILA) and 12 C.F.R. part 1026 (Regulation Z).
8 However, the DOD has indicated that “an overdraft service typically would not be covered as consumer credit because Regulation Z excludes from ‘finance charge’ any charge imposed by a creditor for credit extended to pay an item that overdraws an asset account and for which the borrower pays any fee or charge, unless the payment of such an item and the imposition of the fee or charge were previously agreed upon in writing.” (Emphasis added.) 80 Fed. Reg. 43560, 43580 (July 22, 2015). See also the first interpretative question and answer at 81 Fed. Reg. 58840 (August 26, 2016).
15 32 C.F.R. §232.3(i). The term creditor also includes an assignee of a person engaged in the business of extending consumer credit with respect to any consumer credit extended.
17 The MAPR is calculated in accordance with 32 C.F.R. §232.4(c).
20 Sections 1026.14(c) and (d) of Regulation Z provide for the methods of computing the APR under several scenarios, such as (1) when the finance charge is determined solely by applying one or more periodic rates; (2) when the finance charge during a billing cycle is or includes a fixed or other charge that is not due to application of a periodic rate, other than a charge with respect to a specific transaction; and (3) when the finance charge during a billing cycle is or includes a charge relating to a specific transaction during the billing cycle. 12 C.F.R. §1026.14.
22 32 C.F.R. §232.4(d). The exclusion for bona fide fees does not apply to charges based on application of a periodic rate, credit insurance premiums, or to fees for credit-related ancillary products.
23 32 C.F.R. §232.4(d). The DOD has indicated: “The ‘reasonable’ condition for a bona fide fee should be applied flexibly so that, in general, creditors may continue to offer a wide range of credit card products that carry reasonable costs expressly tied to bona fide, specific products or services and which vary depending upon the servicemember’s own choices regarding the use of the card.” 80 Fed. Reg. 43560, 43573.
29 32 C.F.R. §232.6(d)(2) The DOD has explained: “Oral disclosures provided through a toll-free telephone system need only be available under § 232.6(d)(2) (ii)(B) for a duration of time reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.” 81 Fed. Reg. 58840, 58844 (August 26, 2016).
40 50 U.S. C. §3953(b). See also 50 U.S.C. §3954 (regarding settlement of stayed cases related to personal property (either under a mortgage or purchase contract)).
51 See In the Matter of U.S. Bank National Association, Consent Order, 2013‐ CFPB‐0003 (June 26, 2013) and In the Matter of Dealers’ Financial Services, LLC, Consent Order, 2013‐CFPB‐0004 (June 25, 2013) (CFPB alleged that U.S. Bank and Dealers Financial partnered to require servicemembers to repay subprime automobile loans by allotment and, among other things, failed to disclose fees, failed to properly disclose payment schedules, and misrepresented charges for add-on products); Consumer Financial Protection Bureau et al. v. Freedom Stores, Inc. et al., Civ. Action No. 2:14-cv-643-AWA-TEM (E.D. Va.), Complaint (December 18, 2014) and Final Order (January 9, 2015) (CFPB, with the attorneys general of North Carolina and Virginia, alleged that a retailer and associated finance companies unlawfully double-dipped by taking payments via both a servicemember’s allotment and bank or other required back-up account in the same month, and otherwise engaged in unfair or abusive debt collection practices, such as including nonnegotiable clauses in loan agreements mandating that disputes be resolved in a distant venue inconvenient for servicemembers); and In the Matter of Fort Knox National Company and Military Assistance Co., LLC, Consent Order, 2015-CFPB-0008 (April 20, 2015) (CFPB alleged that military allotment processors failed to disclose fee amounts for residual balances in allotment accounts and the fact that fees were charged).
52 Neither the MLA nor SCRA requires any specific method for confirming the military service status of an individual.
53 See Military.com, “A Financial Guide to PCS Moves,” https://www.military.com/money/pcs-dity-move/easing-stress-of-moving.html.
54 See CA 12-8, “Mortgage Servicing Practices Concerning Military Homeowners with Permanent Change of Station Orders” (June 21, 2012), https://www. federalreserve.gov/supervisionreg/caletters/caltr1208.htm.

References: §101
 §1601
 §232
 §232
 §1026
 §232
 §232
 §232
 § 232
 §3953
 §3954
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