By Joseph Simon
The Department of Defense (DOD) has implemented a new regulation to address predatory lending practices and the effects of such practices on military members and their families. It requires creditors to provide additional disclosures on certain types of loans to military personnel, and imposes several substantive limitations on such loans, including a cap on the military annual percentage rate (MAPR).
Those affected under this regulation are referred to as “covered borrowers.” A covered borrower is a person who, at the time he or she becomes obligated on a consumer credit transaction, is a regular or reserve member of the Army, Navy, Marine Corps, Air Force or Coast Guard; serving on active duty for more than 30 days; such a member serving on Active Guard and Reserve duty; the member’s spouse or child; or an individual for whom the member provided more than half of the individual’s support for 180 days immediately preceding an extension of consumer credit covered by the regulation.
The DOD has identified three consumer credit products that are susceptible to abusive credit practices: payday loans, vehicle title loans and tax refund anticipation loans. (Other types of loans are not subject to the new regulation.) Creditors must provide certain additional disclosures to covered borrowers for these three types of loans and are restricted with respect to the consumer credit they may offer to such borrowers.
Payday Loans: A payday loan is defined as a closed-end credit transaction having a term of 91 days or less, where the amount financed does not exceed $2,000. The definition is limited to transactions where the borrower contemporaneously provides a check or other payment instrument that the creditor agrees to hold, or where the borrower contemporaneously authorizes the creditor to initiate a debit to the covered borrower’s account. The final rule does not apply, however, to any right of a depository institution under statute or common law to offset indebtedness against funds on deposit in the event of the covered borrower’s delinquency or default.
Vehicle Title Loans: The final rule defines a vehicle title loan as closed-end credit with a term of 181 days or less, which credit is secured by the title to a motor vehicle owned by a covered borrower and that has been registered for use on public roads. The definition expressly excludes purchase money transactions where the credit is secured by the vehicle that is being purchased or leased.
Tax Refund Anticipation Loans: A tax refund anticipation loan is defined as closed-end credit in which the covered borrower expressly grants the creditor the right to receive all or part of the borrower’s income tax refund or agrees to repay the loan with the proceeds of the borrower’s refund. The intent of the regulation is to cover credit products designed expressly to use tax refunds as collateral for the loan. The rule does not cover loans where borrowers merely note that a tax refund may be used to repay the advance.
Regarding any extension of consumer credit to a covered borrower, a creditor must provide these disclosures clearly and conspicuously before consummation of the credit transaction: the MAPR and the total dollar amount of all charges included in the MAPR; any disclosures required by Regulation Z, the federal regulation that implements the Federal Truth in Lending Act; a clear description of the payment obligation of the covered borrower (a payment schedule provided under Regulation Z satisfies the requirement); and a required statement regarding protections given under Federal law.
The disclosures must be provided in writing in a form the borrower can keep and, except for the Regulation Z disclosures, they must be provided orally and in writing. In loans entered into by mail or over the Internet, a creditor can comply with this requirement by providing a toll-free telephone number on or with the written disclosures and providing oral disclosures when contacted for this purpose.
Under the final rule, a creditor or an assignee may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit to a covered borrower. The MAPR does not include fees imposed on the borrower for unanticipated late payments, default, delinquency or a similar occurrence as such fees are imposed as a result of contingent events that may occur after the loan is consummated.
The final rule provides assistance in identifying which borrowers are covered and establishes a safe harbor for creditors. Under the final rule, a creditor may require the applicant to sign a statement declaring whether or not he or she is a covered borrower (covered borrower statement) and if required, the covered borrower statement provides a safe harbor to protect creditors from any inadvertent violations of the statute. However, if the applicant signs the covered borrower statement, but the creditor later discovers the applicant is in fact covered, then the applicant’s declaration would not create a safe harbor for the creditor.
The regulation makes it unlawful for any creditor to roll over, renew, repay, refinance or consolidate any covered consumer credit extended by that creditor to the same covered borrower, unless the new transaction results in more favorable terms, such as a lower MAPR. Additionally, it is unlawful for any creditor to extend consumer credit to a covered borrower in which: the covered borrower is required to waive its right to legal recourse; the creditor requires the covered borrower to submit to arbitration or imposes other onerous legal notice provisions in the case of dispute; the creditor demands unreasonable notice as a condition for legal action; the creditor uses a check or other method of access to a deposit, savings or other financial account maintained by the covered borrower, except in certain limited circumstances; the covered borrower is required to establish an allotment to repay the obligation; or the covered borrower is prohibited from prepaying the obligation or is charged a penalty fee for prepaying all or part of the loan.
Joseph Simon is a partner at Cullen and Dykman (www.cullenanddykman.com), where he handles regulatory, compliance, corporate and transactional matters for financial institutions, and real estate matters for all types of clients.