WASHINGTON — Credit union trade association attorneys have said they are pleased so far with what they have seen in the Department of Defense's proposed regulation regarding limitations on loans to military service members, but time–and members–will tell some in the industry have said.
The John Warner National Defense Authorization Act sets limitations on the terms of extensions of credit to service members and their families. Payday and other fringe lenders have been spotlighted in the media as preying upon young, regularly but low-paid members of the military. In particular, credit unions and banks were concerned about what would fall under the 36% interest rate cap to be applied to service members and their families; NCUA and the federal banking regulators served in consultation roles on the proposal.
The DoD proposal establishes a separate military annual percentage rate (MAPR) for service members and their families that includes interest, fees, credit service charges, credit renewal charges, credit insurance premiums, fees for debt cancellation or debt suspension agreements, and fees for credit related products sold in connection with the credit. Some of lenders' concerns were allayed by the fact that the MAPR does not include unanticipated late payment fees, defaults or delinquencies because that occurs after the loan is already made. Additionally, loans made prior to the new rule are not covered.
"From the onset, all of us were very concerned about the unintended consequences of this legislation," DCUC Executive Director Arty Arteaga said. However, he added, DoD is aware that credit unions are not the problem and was not about to injure their relations with the military. "It's all about faith and trust. It's all about relationships."
"It's definitely worth mentioning, specifically credit unions serving military service members…were commended at least three times for what they do," CUNA Deputy General Counsel and Senior Vice President of Regulatory Advocacy Mary Dunn added. It reads, "The Department would prefer Service members and their families who experience financial duress seek out the alternatives available through Military Aid Societies, military banks and defense credit unions rather than credit products that would more likely mire them in a cycle of debt. These institutions have established programs and products designed to help Service members and their families resolve their financial crises, rebuild their credit and establish savings."
The proposal adds, "Many of these military banks and credit unions use their products and services to maintain a watchful eye over their members to ensure they do not abuse services designed to assist them, such as overdraft protections, which if used on a chronic basis, can become very expensive and propel someone already overextended into a deeper spiral of debt."
NCUA Chairman JoAnn Johnson commented, "In part because of NCUA involvement, credit unions have been generally recognized to be a part of the solution and not a part of the problem in this area. NCUA has consulted with the Department of Defense in helping to develop a workable rule addressing predatory lending, which when finalized, will represent a practical and targeted effort that diminishes these practices."
DoD stated, "The cycle of debt represents a more significant concern to the Department than the high cost of credit." According to CUNA's analysis, the proposed definitions refer to "consumer credit" as closed-end loan products specifically cited in the proposal, which includes payday loans, vehicle title loans, and tax refund anticipation loans. Payday loans are defined as $2,000 or less with a 91-day term or less and are re-paid by a post-dated check from the borrower at the time of the loan. Vehicle title loans are described as closed-end loans secured by a vehicle title for 180 days or less other than an original purchase transaction. Finally, refund anticipation loans are closed-end transactions where the creditor receives all or part of the borrowers tax refund for repayment.
These parameters will exclude most credit union alternatives to payday and other predatory loans from coverage, Dunn expects. The proposal, she noted, also does not cover credit cards, residential mortgages, overdraft protection, car loans or other personal property loans where credit is offered for a specific purpose.
NAFCU Associate Director of Regulatory Affairs Pamela Yu explained that while there is no blanket carve out for federal depository institutions, there is a safe harbor for identification of covered borrowers and exceptions for work out loans and other refinancings that are beneficial to the borrower. However, if the service member does not initially disclose that they are covered, but documentation shows otherwise, the lender must treat them as covered. Active military orders can be requested as proof of coverage.
Additionally, Arteaga pointed out, the DoD plans to modify its database under the Servicemembers Civil Relief Act to help lenders identify those covered under this new regulation.
Willful violations can result in fines and/or up to one year in jail, as provided for in the law. DoD noted that regulated financial services entities like banks and credit unions have their primary regulators watching over them. However, private litigation of others may be "insufficient to ensure uniform compliance," according to DoD.
The rule is out for a 60-day comment period. A final rule is expected by Sept. 1 in order to make the Oct. 1 effective date in the law.
"In my mind, it's a good first step," Arteaga stated.
Dunn agreed. "In general, they really have tried to make this the least burdensome as possible," she said.
The representatives of DCUC, CUNA, and NAFCU each said they expect feedback from their individual memberships before they comment again to DoD and said they thought the separate MAPR could be a source of confusion. "My initial reaction is it shows DoD's trying to be very, very careful and trying to limit the scope of the regulation," Yu said, but NAFCU's comments will come down to what it hears from its members. –scooke@cutimes.com
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