New Usury Rates for Servicemembers

I haven't completed a full review yet of HR 5122, but it looks like it will impose a 36% APR on loans to persons and dependants in the military effective 10-01-07, and potentially earlier.

This may impact those lenders making small, short term loans to active duty (and those being called up) military. I'm not sure who will enforce this. DoD has more authority than I'd like to see them have and will this be enforced against the payday lenders that are the true subject of the problem?

I'll be interested to see your take on this, Andy. We were discussing it yesterday and it seems to prohibit things we take for granted, like CD loans. We're concerned about the definition of dependent. It's anyone that's received support from a service member for more than 180 days. That could include absolutely any person. It seems like we would have to ask if an applicant received support from a service member in order to ensure the proper disclosures are made. And the APR calcuations include things not in the current Reg Z calculation. It seems we'd have to either show two APR's or have two calculations and show the applicable APR.

I haven't completed a thorough analysis, but yes, you're on the right road. You'll have to ask if they're a dependant of a SM (as it is defined here) and you'll have fees adding to the APR that normally do not.

andy, can you provide a link...I have read some sections, but have not found the "financial" implications. I DID find where the military would be provided access to chiropractic care...that's a good thing, but I didn't find anything on our impact. Being a military community in at least one market and near others, this could have a reaching affect on us...thanks in advance!

Search Thomas for HR5122 and look at 670, or see below.


SEC. 670. LIMITATIONS ON TERMS OF CONSUMER CREDIT EXTENDED TO SERVICEMEMBERS AND DEPENDENTS.

(a) Terms of Consumer Credit- Chapter 49 of title 10, United States Code, is amended by adding at the end the following new section:

`Sec. 987. Terms of consumer credit extended to members and dependents: limitations

`(a) Interest- A creditor who extends consumer credit to a covered member of the armed forces or a dependent of such a member shall not require the member or dependent to pay interest with respect to the extension of such credit, except as--

`(1) agreed to under the terms of the credit agreement or promissory note;

`(2) authorized by applicable State or Federal law; and

`(3) not specifically prohibited by this section.

`(b) Annual Percentage Rate- A creditor described in subsection (a) may not impose an annual percentage rate of interest greater than 36 percent with respect to the consumer credit extended to a covered member or a dependent of a covered member.

`(c) Mandatory Loan Disclosures-

`(1) INFORMATION REQUIRED- With respect to any extension of consumer credit (including any consumer credit originated or extended through the internet) to a covered member or a dependent of a covered member, a creditor shall provide to the member or dependent the following information orally and in writing before the issuance of the credit:

`(A) A statement of the annual percentage rate of interest applicable to the extension of credit.

`(B) Any disclosures required under the Truth in Lending Act (15 U.S.C. 1601 et seq.).

`(C) A clear description of the payment obligations of the member or dependent, as applicable.

`(2) TERMS- Such disclosures shall be presented in accordance with terms prescribed by the regulations issued by the Board of Governors of the Federal Reserve System to implement the Truth in Lending Act (15 U.S.C. 1601 et seq.).

`(d) Preemption-

`(1) INCONSISTENT LAWS- Except as provided in subsection (f)(2), this section preempts any State or Federal law, rule, or regulation, including any State usury law, to the extent that such law, rule, or regulation is inconsistent with this section, except that this section shall not preempt any such law, rule, or regulation that provides protection to a covered member or a dependent of such a member in addition to the protection provided by this section.

`(2) DIFFERENT TREATMENT UNDER STATE LAW OF MEMBERS AND DEPENDENTS PROHIBITED- States shall not--

`(A) authorize creditors to charge covered members and their dependents annual percentage rates of interest for loans higher than the legal limit for residents of the State; or

`(B) permit violation or waiver of any State consumer lending protections for the benefit of residents of the State on the basis of nonresident or military status of a covered member or dependent of such a member, regardless of the member's or dependent's domicile or permanent home of record.

`(e) Limitations- It shall be unlawful for any creditor to extend consumer credit to a covered member or a dependent of such a member with respect to which--

`(1) the creditor rolls over, renews, repays, refinances, or consolidates any consumer credit extended to the borrower by the same creditor with the proceeds of other credit extended to the same covered member or a dependent;

`(2) the borrower is required to waive the borrower's right to legal recourse under any otherwise applicable provision of State or Federal law, including any provision of the Servicemembers Civil Relief Act;

`(3) the creditor requires the borrower to submit to arbitration or imposes onerous legal notice provisions in the case of a dispute;

`(4) the creditor demands unreasonable notice from the borrower as a condition for legal action;

`(5) the creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the borrower, or the title of a vehicle as security for the obligation;

`(6) the creditor requires as a condition for the extension of credit that the borrower establish an allotment to repay an obligation; or

`(7) the borrower is prohibited from prepaying the loan or is charged a penalty or fee for prepaying all or part of the loan.

`(f) Penalties and Remedies-

`(1) MISDEMEANOR- A creditor who knowingly violates this section shall be fined as provided in title 18, or imprisoned for not more than one year, or both.

`(2) PRESERVATION OF OTHER REMEDIES- The remedies and rights provided under this section are in addition to and do not preclude any remedy otherwise available under law to the person claiming relief under this section, including any award for consequential and punitive damages.

`(3) CONTRACT VOID- Any credit agreement, promissory note, or other contract prohibited under this section is void from the inception of such contract.

`(4) ARBITRATION- Notwithstanding section 2 of title 9, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit shall be enforceable against any covered member or dependent of such a member, or any person who was a covered member or dependent of that member when the agreement was made.

`(g) Servicemembers Civil Relief Act Protections Unaffected- Nothing in this section may be construed to limit or otherwise affect the applicability of section 207 of the Servicemembers Civil Relief Act (50 U.S.C. App. 527).

`(h) Regulations- (1) The Secretary of Defense shall prescribe regulations to carry out this section.

`(2) Such regulations shall establish the following:

`(A) Disclosures required of any creditor that extends consumer credit to a covered member or dependent of such a member.

`(B) The method for calculating the applicable annual percentage rate of interest on such obligations, in accordance with the limit established under this section.

`(C) A maximum allowable amount of all fees, and the types of fees, associated with any such extension of credit, to be expressed and disclosed to the borrower as a total amount and as a percentage of the principal amount of the obligation, at the time at which the transaction is entered into.

`(D) Definitions of `creditor' under paragraph (5) and `consumer credit' under paragraph (6) of subsection (i), consistent with the provisions of this section.

`(E) Such other criteria or limitations as the Secretary of Defense determines appropriate, consistent with the provisions of this section.

`(3) In prescribing regulations under this subsection, the Secretary of Defense shall consult with the following:

`(A) The Federal Trade Commission.

`(B) The Board of Governors of the Federal Reserve System.

`(C) The Office of the Comptroller of the Currency.

`(D) The Federal Deposit Insurance Corporation.

`(E) The Office of Thrift Supervision.

`(F) The National Credit Union Administration.

`(G) The Treasury Department.

`(i) Definitions- In this section:

`(1) COVERED MEMBER- The term `covered member' means a member of the armed forces who is--

`(A) on active duty under a call or order that does not specify a period of 30 days or less; or

`(B) on active Guard and Reserve Duty.

`(2) DEPENDENT- The term `dependent', with respect to a covered member, means--

`(A) the member's spouse;

`(B) the member's child (as defined in section 101(4) of title 38); or

`(C) an individual for whom the member provided more than one-half of the individual's support for 180 days immediately preceding an extension of consumer credit covered by this section.

`(3) INTEREST- The term `interest' includes all cost elements associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary product sold with any extension of credit to a servicemember or the servicemember's dependent, as applicable, and any other charge or premium with respect to the extension of consumer credit.

`(4) ANNUAL PERCENTAGE RATE- The term `annual percentage rate' has the same meaning as in section 107 of the Truth and Lending Act (15 U.S.C. 1606), as implemented by regulations of the Board of Governors of the Federal Reserve System. For purposes of this section, such term includes all fees and charges, including charges and fees for single premium credit insurance and other ancillary products sold in connection with the credit transaction, and such fees and charges shall be included in the calculation of the annual percentage rate.

`(5) CREDITOR- The term `creditor' means a person--

`(A) who--

`(i) is engaged in the business of extending consumer credit; and

`(ii) meets such additional criteria as are specified for such purpose in regulations prescribed under this section; or

`(B) who is an assignee of a person described in subparagraph (A) with respect to any consumer credit extended.

`(6) CONSUMER CREDIT- The term `consumer credit' has the meaning provided for such term in regulations prescribed under this section, except that such term does not include (A) a residential mortgage, or (B) a loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.'.

(b) Clerical Amendment- The table of sections at the beginning of such title is amended by adding at the end the following new item:

`987. Terms of consumer credit extended to members and dependents: limitations.'.

(c) Effective Date-

(1) IN GENERAL- Except as provided in paragraph (2), section 987 of title 10, United States Code, as added by subsection (a), shall take effect on October 1, 2007, or on such earlier date as may be prescribed by the Secretary of Defense, and shall apply with respect to extensions of consumer credit on or after such effective date.

(2) AUTHORITY TO PRESCRIBE REGULATIONS- Subsection (h) of such section shall take effect on the date of the enactment of this Act.

(3) PUBLICATION OF EARLIER EFFECTIVE DATE- If the Secretary of Defense prescribes an effective date for section 987 of title 10, United States Code, as added by subsection (a), earlier than October 1, 2007, the Secretary shall publish that date in the Federal Register. Such publication shall be made not less than 90 days before that earlier effective date.

(d) Interim Regulations- The Secretary of Defense may prescribe interim regulations as necessary to carry out such section. For the purpose of prescribing such interim regulations, the Secretary is excepted from compliance with the notice-and-comment requirements of section 553 of title 5, United States Code. All interim rules prescribed under the authority of this subsection that are not earlier superseded by final rules shall expire no later than 270 days after the effective date of section 987 of title 10, United States Code, as added by this section.

Wow, thanks Andy! That was MUCH easier...

I saw this referenced in a BOL Q&A this morning and don't recall seeing anything and missed it in the thread. When was this announced?

Look at the usury article from the Executive Briefing (which you can subscribe to for free) for my recap.

In my article I indicate Sen. Tim Johnson (SD) wanted to review this provision. Since then, the Daily Briefing has reported on the Federal Register proposal and Sen. Johnson is ill, potentially suffering a stroke. This could revert the Senate back to a Republican majority and potentially with no one to champion this cause.

Net-net-net, sharpen your pencils and write comment letters. This affects you even if you don't commonly lend to a servicemember or their dependents. You'll have to ask all your applicants if they are.

Also note the recent Federal Register notice from the Department of Defense in which the Department asked for input in crafting the regulations that will be issued, assuming no change in the law as it stands. You'll find a link to it under the date 12/11/06 on our Top Stories page.

It's interesting to note that the Defense Department is already aware that the law as it stands may have the unintended consequence of making it more difficult for servicemembers and their dependents to find the credit they need.

Mary Beth Guard and Jack Holzknecht plan to discuss the new law in detail during their January 12 webinar on Lending to Servicemembers. They'll also be covering the SCRA and special servicemember rights under the FCRA.

Reading through this information, it appears real estate secured loans are exempt as well as loans secured by the proerty (i.e. auto) being purchased. Am I correct in assuming loans secured by liquid collateral, such as a CD, would not be exempt? Thank you.

Although it's a good idea to wait to see what DoD's regulation says on the topic, my read of the legislation jibes with yours on this question.

Thanks John! Merry Christmas!

Has the regulation been published on this section yet?
Do we know where they are at with it?

Comments don't close until Feb. 5, 2007. You still have time to shape this reg.

Have we heard anymore about this new usury law since the comment period closed in February? Thanks.

Nothing yet. We look at the Federal Register every morning to see if Defense has issued the final rules. Implementation is supposed to take place by October 1, but Defense will be hard-pressed to make that deadline with any kind of lead time.

Mary Beth Guard and Jack Holzknecht will be co-presenting a BOL Learning Connect webinar analyzing the new rules on September 28. Click on http://www.bollearningconnect.com and scroll down to September 28 for more information.

John, I received information on the webinar this AM and was quite alarmed. Perhaps I'm way behind on this. Are we expected to be set for 10/01 even if regulations are not out?

If the reg isn't out, there is nothing to follow at that point. Similar to the FCRA rules we're still waiting for.

The fear is if they release rules and want compliance in 30 days. That wouldn't be reasonable, but some of think this isn't reasonable already.

It is here in today's Federal Register and rest assured BOL is already doing an analysis to see what your new responsibilities will be under the new reg.
http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/07-4264.pdf

Andy, what in the world are you doing working at 3:48 AM???

Am I reading it right - we have to have these changes in place by 10/1/07?

Yes, that's the deadline. Fortunately, the covered transactions are so narrowly defined that most depository institutions should be able to avoid coverage by tightening policies.

Tax refund anticipation loans will be an exception. If you make these loans, you will need to implement the new regs.

Yes, I think the tax refund will affect us. Thanks
Edit: and I was wrong thanks to another reading of the reg

Am I correct in reading that if we don't make any loans that qualify under this reg then we do not need to ask each customer if they are a covered borrower?

We're working on a paper to provide additional guidance on this now. Hopefully it will answer your immediate questions.

Sinatra Fan, I was at it before that, so that we could meet your immediate need for information. If someone felt getting the FR out at o'dark thirty was important, we thought reading it was too. :P Are we dedicated or what!

We figured the FR would have this today and if it applies to you, there is a very short time for implementation. So you may need answers now, and don't want to spend the weekend on this stuff.

That's the way I read it. You can't afford to make a mistake, however. The penalties for violating this reg appear to include 100% of principal and interest.

It also allows for criminal penalties.

Messing up on one or two of these wouldn't cause real problems for the bank, but having a big program for these loans and having a procedural error that lasted a year or two could require a resume update for someone.

Check out the Summary we put together.
http://www.bankersonline.com/lending/defenseloanreg_final_amz.html

Mary Beth Guard and Jack Holzknecht will be presenting a BOL Learning Connect webinar, "New Rules for Consumer Loans to Servicemembers," on September 14 (note the date change). Click HERE for information.

If the bank makes a $2,000 or smaller closed-end loan, for 91 days or less and the borrower authorizes payments to be debited from his checking account, does that loan come under the definition of a "payday loan"?

I don't think it would be a payday loan. Here's my thought process:
232.3(b)(1)(i)(B) includes the term electronic funds transfer.
232.3(g) uses the same definition of electronic funds transfer as Reg E
205.3(c)(5)appears to exempt this type of transaction from the definition of an EFT.
My comfort level isn't very high on this so hopefully one of our experts will confirm or correct.

Our Bank loan software company has stated that they will not update their software to include this calculation or the disclosures. Can anyone tell me some software companies that would offer this product?

Our lending software co.(Harland LaserPro) is NOT updating their software. They do not support these types of lending products! Nice, huh?

Cowboys Fan -- It would appear that an in-house loan of that type, with an internal electronic debit (bank holding the deposit also makes and keeps the loan) would not meet the strict definition of "payday loan" because of the Reg. E exception you've noted.

The hangup could be the fact that you cannot require the electronic payment authorization as a condition of extending credit. If the service member balks and you accept a post-dated check in order to make the payment, BAM, you're looking at a payday loan.

Also, be aware that nowhere in the material accompanying the regulation does DoD note that little exception. My guess is that you'd have to scrap with an examiner to win an argument over whether the 12 CFR 205.3(c)(5) exception carves some loans out.

What are your thoughts on simply writing into policy that we don't make these types of loans, especially if our software can't support the "MAPR"? What are the fair lending implications? I'm thinking we'd be okay if the reason is a business decision made in part due to the inability to calculate the "MAPR," but don't feel entirely confident of that if we do have the ability to do the calculation.

Thank you for the info John.

You could change loan policy to restrict loans under $2500 to an open -end line of credit.

You can write whatever you want into your policy. However, your policy does not dictate what a loan is. How the loan is underwritten and the terms of the loan dictates what type of loan it is.

Doing this would be no different than writing in your loan policy you do not take telephone applications, but you have one loan officer that constantly takes loan requests from their customers over the telephone, therefore you do take telephone applications. Your actions dictate what you do, not your written "intentions".

Lets think this one through. I think Lois' example may well be a payday loan, but I admire your ability to see an exception based on Reg E.

The spirit and intent was to protect servicemembers from abuses. Personally, this is an envelope I wouldn't want to push. Do you have a technical out, yes, possibly. Would I want to stand up and defend this position, no way. It wouldn't be worth it.

Landlords in my area (I am not proud to say) read the lease protections in the SCRA. When a SM needed to get out of a lease because they were deploying or moving, they let the SM out of the lease, but enforced it on the spouse (working or not) who now intended to go home to family during this period. Was it within the parameters allowed by law, yes. Was it withing the spirit and intent, no. Was it a huge black eye for those using this clause to retain tenants, absolutely.

As noted above, internally, I'd make it a policy (and a practice) that loans meeting the criteria here NOT be in the banks list of available products, unless the bankers want to comply with these requirements. Is this a common product, or an odd duck for you. If it is the exception, just don't do them.

I'm going to temper what I wrote above a bit. I think that relying on the apparent exception in Reg. E's definition of EFT is a bit of a risk. Although we have cited 205.3(c)(5)(iii) for years to create an exception to the Reg. E compliance requirements for auto-loan debits, the regulation doesn't come right out and mention loan payments as an exception at all. And there is no cover in the Interpretations to this section, either.

Devil's advocate department:
It's reasonable to interpret this subparagraph as describing loan payments because this is where the regulation reminds us that you can't condition the extension of credit on an agreement to have payments deducted by EFT.

Back to the principal argument:
It's clear to me that using the exception suggested by Cowboys Fan above would be contrary to the spirit of the DoD regulation. It's no less injurious to a service member for her own bank to make such a loan than for a non-bank payday lender to do the same, assuming the same rates and fees.

At any rate, I suggest that anyone considering these loans would be inviting a lot less scrutiny if they would look at the loan terms and adjust them so they are clearly outside the reach of the DoD regulation.

OK - so payday is still somewhat up in the air. Lets move on to the other 2

2. Title Loan = Say a customer is trading vehicles and wants to sell their old one theirselves, so we make them a loan secured by the old vehic (previously fee and clear) for 120 days to give them $ for a down payment on the new vehic and time to sell their old one.
I think this would fall under the definition.

3. Tax Refund = We are a bank that has a good volume of consumer loans, and we have customers who want to borrow for christmas expenses and we do a 4 - 6 month single pay loan with the identified source of repayment being their tax refund (the anticipate to receive like they have in prior years).
I think this would fall under the definition.

WOW - we apparently fall under this new reg and don't want to !?!?!

3. I don't think it would be based on the comments on page 50586 of the Federal Register link from above: "The rule does not cover loans where borrowers merely note that a tax refund may be used to repay the advance."

I agree with CF on #3, and also don't lose sight that these rules only apply to a service member or their qualifying dependent. If the applicant is not a covered person you have no worries. We will have the "covered persons" statement provided in the Reg. signed at the time of application so we will know how to proceed with the processing. We are also fortunate in that a very small percentage of our customers will be covered by the regulation.

I would not exactly agree that you have no worries if the applicant is not a covered person. If a bank makes a loan that falls into one of the three categories, they will need to have the covered person statement signed (whether or not they end up being a covered person).

If you are like us (software vendor has stated they will not be upgrading to incorporate the new MAPR requirements), then your only option would be to find a new software company or completely stop making loans that would fall into any of the three categories.

Dan,
Are you going to give this disclosure to all applicants, or only to those who apply for a loan that would be covered by the reg?

The problem is, however, you have to spend the same time and money implementing the rule unless you can get the percentage of covered borrowers and covered products down to 0.000%.

Absolutely. "Close enough" only counts in hand grenades and nuclear bombs. Here, one puts you in the game and the requirements need to be addressed.

I had always heard that "close enough" counted in horseshoes as well...

You are correct. But I was "on duty" for that post and horse shoes is an after hours R&R activity.

Since this law takes effect on Oct. 1st, anyone have any suggestions on how to get to the MAPR? In the prohibitions of the new law, a bank could not take a deposit account of a "covered person" nor could the "covered person" provide an allotment to repay the loan. My question is, doesn't these prohibitions limit the amount of credit availablity to a servicemember? Based upon the discussion here, the banks may have to prepare to comply and treat each request on a case by case basis. Maybe, if enough servicemembers complain about the new law, and the lack of access to credit, the DoD may see the need for some timely revision. (but don't count on it)

Any takers on #2.
And as R. Insley said, what I am trying to do is get us down so that our products do not fall within the definitions and therefore we avoid the "Covered Person" notice as well as the MAPR and everything else.

Section 232.3(b)(1)(ii) defines a vehicle title loan as: Closed-end credit with a term of 181 days or fewer that is secured by the title to a motor vehicle, that has been registered for use
on public roads and owned by a covered borrower, other than a purchase money transaction described in paragraph (b)(2)(ii) of this section. Paragraph (b)(2)(ii) provides that the following would not be not meet the definition of "consumer credit": "any credit transaction to finance the purchase or lease of a motor vehicle when the credit is secured by the vehicle being purchased or leased;"

So it would appear in your scenario since your loan would be less than 181 days and is secured by the old car and not the car being purchased, this loan would be a covered loan.

Our advice is to credit admin is to get to o.oo%. In portfolio review, we don't have but a tiny percentage of loans that come near the definition of covered transactions and we have many branches near military installations. The disclosure is an issue in that you either give it on all consumer loans, or risk inadvertantly missing giving it on the loans that fall within the definitions. It's not a viable risk, IMO. I believe we will amend loan policy to prohibit these loans and offer an alternative credit product instead.

Also, Jack Henry has not developed a MAPR solution and I don't expect it really to be in place by the deadline either.

Your risk assessment is right on the mark. I came to the same conclusion, but was influenced even more by the lack of rewards. With a 36% MAPR cap (and the possibility that some of the MFC goes to 3rd parties), small loan amounts, and short terms, I don't see how anyone can make enough money to justify offering covered products.

Have I missed something? Have any BOLers' banks done a feasibility analysis with 36% MAPR and concluded they can earn enough to pay the help and keep the lights on?

Richard, we have not actually run the numbers, but I agree with your "mental" assessment regarding same...it makes no sense when there are other types of small credit available that work without the hassle...including in particular, open-end lines.

FWIW, this is our plan too: not to make any loans that fall within the rule.

Additionally, one other issue that I've been thinking about and would like others' thoughts on is the "assignee" liability. I don't believe "Assignee" is defined in the rule. If you are a commercial bank, and lend to finance companies or other types of lending companies, or other commercial companies that might lend to covered borrowers, are you potentially liable for violations of the rule if you take as collateral for the loan to a finance company, an assignment of loans that might fall within the rule?

ToTo, counsel is your best bet for an answer. But I would believe that if you can end up owning that loan, you would have liability. Holder in Due Course would apply. And yes, if there was a violation, the notes would be worthless plus you'd have the liability of what had been paid already.

As to banks doing these loans, I'd bet some will, but a real minority at best. I say this only because as a military banker (probably for linger than some posters here have been alive) there are loss leader products that are made and products offered that do lose money, but that build good will and help the military bank keep its contract to operate on post/base.

Regardless, it is a training issue that must be addressed.