Credit Union Groups Say DoD's Dual APR/MAPR Confusing, Advocate for Longer Compliance Period
WASHINGTON -- While generally supporting the Department of Defense's anti-predatory lending regulation, credit union organizations made numerous recommendations for improvement.
The comment period on the DoD reg on Limitations on Terms of Consumer Credit Extended to Service Members and Dependents came to a close June 11 with credit union groups seeking amendments and clarifications on a variety of its provisions. Universally through, CUNA and DCUC, NAFCU, and NASCUS stated that credit unions are part of the solution and not the problem.
"As we have expressed on several previous occasions, NAFCU is strongly supportive of the recent legislative efforts to curb predatory lending practices targeting military personnel and their families. Credit unions, as member-owned-and-operated financial depository institutions, have long been--and will continue to be--at the front lines in the battle against unscrupulous lending practices, particularly those that exploit military personnel," NAFCU President/CEO Fred Becker commented.
CUNA President/CEO Dan Mica and Defense Credit Union Council President/CEO Arty Arteaga wrote in their joint letter, "We appreciate the DoD's balanced approach to implement the law and appreciate DoD's carefully worded proposal targeting those abusive lending practices that have negatively impacted the financial readiness of our troops."
"Working together," NASCUS Executive Vice President of Government Relations Sandra Troutman wrote in her organization's comment letter, "we are confident that we can prevent unintended consequences of the proposed consumer lending standards to our military personnel and their families."
NAFCU stated that credit unions are not part of the problem, but a carve-out for federally regulated financial institutions is not necessary either at this time. However, the functional regulators, Becker said, are best equipped to regulate their institutions for compliance and urged DoD "to fully capitalize on the extensive oversight capabilities of the federal financial regulatory agencies."
CUNA and DCUC said that the rule should be consistent in what entities are covered; DoD advised there would be no exclusions yet the proposal does exclude "governmental entities," which is not defined, from coverage as a "creditor." Mica and Arteaga wrote, "If the intent of the statute applies to all creditors, then clearly the rule should include governmental entities as well. That being said, if government agencies are excluded from the rule, we submit DoD should consider whether federal and state chartered credit unions regulated by their respective agencies should also be excluded."
NASCUS added that if such a carve-out is provided for federally regulated institutions, it should also be applied to state regulated institutions.
To simplify things, the four credit union associations recommended that the Reg Z definition of APR be adopted rather than creating the new Military Annual Percentage Rate. "NAFCU firmly believes that the similarities in the statutory language indicated that Congress did not intend to alter the definition of APR as it is determined under TILA, and that the Defense act should be read to be consistent with TILA and Regulation Z.
"As NAFCU has already indicated on previous occasions, any dual disclosure requirements will clearly confuse military borrowers. Indeed, multiple disclosures will inhibit loan comparison, hinder the accurate promotion of credit products and unduly complicate advertisements, and might even lead to the mistaken perception that military consumers are being unfairly discriminated against."
NASCUS also highlighted the cost and burden to credit unions for two separate disclosures.
If DoD maintains the MAPR, CUNA and the Defense Credit Union Council said, "We would also appreciate clarification regarding the fees included in the MAPR...We request clarification with the final rule to indicate that no fee would be included if it is not financed, deducted from the credit, or otherwise required." The two groups asked that all voluntary fees, insurance premiums, warranties, or charges for credit related products be clearly excluded in
addition to any future unknown fees at the time credit is extended.
NASCUS and NAFCU also asked that an unqualified "safe harbor" in determining who is covered should be in the DoD reg; as written there is a caveat that if a service member denies being covered but the loan documentation shows otherwise, the institution would not be protected. A Web site is to be created and maintained for checking coverage, but NASCUS' Troutman pointed out that it might not be updated at the time of application when an employee would check on it. "The bottom line is that a creditor is subject to fines or even jail for potential inaccuracies and the control mechanisms are not necessarily within his control," she wrote.
Becker's letter read, "[O]therwise, legitimate and fair lenders will be frustrated from providing financial products and services that are in the best interest of America's military families due to concerns over penalties." He said that if creditors use the model "covered borrower identification statement," they should retain the safe harbor unless there is a pattern of misconduct or disregard of the law.
None of the groups had a problem with the core of the proposal, namely the definition of "consumer credit," which is focused on payday loans, vehicle title loans, and tax refund anticipation loans. CUNA and DCUC did ask for clarification that any and all open-end credit plans be excluded. Their letter explained an open-end credit plan some credit unions offer for large purchases that add sub-accounts to a member's credit without requiring them to repeat all the usual loan paperwork. Each sub-account has its own interest rate and terms, and they are paid off separately.
Also, the groups asked for clarification to ensure credit union payday loan alternatives are not caught up in the regulation along with the predatory loans.
Consumer Groups Want More
This narrow definition of the products targeted is precisely the problem, according to consumer groups. "The Pentagon has worked hard to get protections in place before the date the law takes effect, and we appreciate their commitment. But these rules end up giving predatory lenders leave to raid the personal funds of the troops," Jean Ann Fox, director of consumer protection for the Consumer Federation of America, said. "This industry knows how to get around even the tightest of regulations. They will have no problem with the narrow definitions in the Pentagon's proposed rules."
CFA, the Center for Responsible Lending, the National Consumer Law Center, Consumers Union, and the National Association of Consumer Advocates wrote, for example, the proposed rules would not stop any predatory car title lending in Virginia, and would not stop payday-like products by banks. The proposed rules would not apply at all to military installment lenders who refinance loans at high fees with little benefit to the borrower.
"The only safe loophole is a low-cost loophole. We just can't allow predatory lenders to ignore these borrower protections, especially the interest rate cap," NCLC Managing Attorney Lauren Saunders stated. "A 36% cap not only stops price gouging on the order of loan sharks, it stops loan flipping too. Predatory lenders just don't find it worth their while to target military families at 36%, though legitimate businesses have no problem operating under
In addition to written disclosures, the law also requires oral disclosures, which could cause problems obtaining proof they were provided when borrowers apply online or over the phone. CUNA and DCUC wrote that "click" and
oral acknowledgement should be permitted for
NAFCU added that the rule should clarify that the oral disclosures could be provided via automated recording to avoid costly 24-hour call center maintenance.
CUNA, DCUC and NASCUS also asked for clarification of what would be considered beneficial to a borrower in a refinancing, particularly so that work out loans would not be covered under the new regulation.
All four advocated for an extended period for compliance as well. The statute requires an Oct. 1, 2007 effective date; DoD said it plans to have a final rule out by Sept. 1. CUNA and DCUC recommended an Oct. 1 effective date with an April 1, 2008 compliance date. NAFCU went out as far as one year from publication in the Federal Register while NASCUS offered no specific timeline.