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Final Rule on Terms of Credit to Service Members and Dependents
by Andy Zavoina
This article provides a brief summary of the final rules of the Department of Defense (DoD) on Limitations on Terms of Consumer Credit Extended to Service Members and Dependents. The final rule was published in the Federal Register on August 31, 2007.
Definitions in the final rule indicate that the scope of this regulation is limited to key loan products where abuse toward servicemembers has occurred. Most banks, thrifts and credit unions are not going to be significantly impacted unless any of these loan products are being offered.
- Payday loans - These are 91 days or less and do not exceed $2,000. A loan in this category may have a check or other payment instrument including a funds transfer authorization provided to the lender when the loan is made.
- Vehicle title loans - These are 181 days or less and exclude those which were to purchase the vehicle.
- Tax refund anticipation loans - These are loans that will be retired directly or indirectly with the refund of a tax return.
Open end credit such as a credit card is exempted as are other loans, including:
- Residential mortgages -- any credit transaction secured by an interest in the borrower’s dwelling;
- Any credit transaction to finance the purchase or lease of a motor vehicle, secured by the vehicle being purchased or leased;
- Any credit transaction to finance the purchase of personal property, secured by the property being purchased;
- Credit secured by a qualified retirement account; and
- Other credit transactions not subject to disclosure requirements under Reg Z.
Lenders who are offering any of the covered loans (1-3 above) will have significant procedural changes to adopt prior to October 1, 2007, the required implementation date. These include:
- For applicable loan products, providing the Identification of Covered Borrower Notice prescribed in the regulation;
- Becoming familiar with appropriate forms of identification such as military identification cards for those on active duty and dependents, as well as Leave and Earnings Statements;
- Approving procedures to take when an applicant says they are covered by the Act, but have no proof;
- Sharing with employees the approved government websites available to verify military status;
- Recognizing applicable loan products or terms which will be "covered loans," and noting that some renewals may be exempted;
- Having the ability to recognize all applicable fees in calculating a Military Annual Percentage Rate (MAPR) and having the software necessary to compute the MAPR and its total cost of credit. It may not exceed 36%; and
- Training employees to make written and oral disclosures as prescribed, and to inform the covered borrower about their ability to seek assistance from other organizations.
Your banking regulator will have authority for examining your bank for compliance, and for enforcement of these new requirements. Additionally, the Department of Defense is soliciting assistance from all the states in enforcing the rules with other lenders. When violations are discovered, the penalties include voiding the credit transaction from inception and criminal penalties.
Related Links
The final regulation, as published in the August 31, 2007, Federal Register: TXT; PDF
Proposed Limitations on Terms of Credit to Service Members and Dependents a BOL Review
The proposed regulation, as published in the April 11, 2007, Federal Register: TXT; PDF
Public Law 109-364 (The John Warner National Defense Authorization Act -- also referred to as the Talent Amendment) (HTML version)
New Usury Law Coming to You (BOL article)
Your Comments May Save You Money (BOL article)
Servicemembers Civil Relief Act Page from BankersOnline
Comments submitted prior to proposal:
Comments of ICBA, ABA, ACB, ICBA, Consumer Bankers Association, Association of Military Banks
Comments of the National Consumer Law Center, Consumer Federation of America, Center for Responsible Lending, Consumers Union, National Association of Consumer Advocates (submitted 2/5/07)
First published on BankersOnline.com 8/31/07
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