WASHINGTON — Credit union trade associations praised the evenhandedness of the Department of Defense's final rule capping closed-end credit interest rates for members of the military and their families.
On Aug. 31, the DoD released its final regulation capping interest rates–and creating a new Military APR–at 36% on closed-end credit that is a payday loan, vehicle title loan, or tax refund anticipation loan with an effective date of Oct. 1. The rule was required under the John Warner National Defense Authorization Act for Fiscal Year 2007; the law came about when the media and others honed in on the issue of predatory lending, particularly in areas around military installations where personnel are typically young, financially inexperienced, and not paid much but regularly.
Payday loans are defined as close-end transactions with a term of 91 days or less and $2,000 or less. Vehicle title loans are capped at 180 days and secured by vehicle title under the final rule. Finally, tax refund anticipation loans are closed end loans providing the creditor the right to receive all or part of the borrower's refund as repayment. The rule also prohibits extending credit to a covered borrower in order to roll it over with the same creditor but permits "beneficial" workout loans and other
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Mortgages and related transactions are expressly exempted from the regulation, as well as auto purchase loans and leases. No types of lenders are excluded from coverage under the rule but only lenders offering the products as defined in the rule are affected.
Enter the MAPR
The final rule, like the proposal, creates a new Military Annual Percentage Rate, which differs from the Federal Reserve's APR, and includes interest, fees, credit service charges, credit renewal charges, credit insurance premiums including charges for single premium credit insurance, fees for debt cancellation or debt suspension agreements and fees for credit-related products sold in connection with the credit and either at or before consummation of the credit transaction. DoD said in the rule, "The Department is concerned that service members are sold products such as voluntary insurance without having these credit insurance products placed in the context of the Service member's employment status or his or her current level of insurance coverage."
The MAPR does not include fees or charges for actual unanticipated late payments, default, delinquency or similar occurrences; taxes or fees prescribed by law that will be paid to public officials; taxes on security instruments if the taxes are required for recording the security instrument; and RAL-associated tax preparation fees.
"The proposal is workable as written but it could be improved to effectively limit predatory lending practices without unnecessarily impeding the availability of credit services for members of the military on active duty and their dependents," Navy Federal Credit Union President/CEO Cutler Dawson wrote during the comment period on the proposal. Navy Federal, which does not offer any of the covered products at this time, also said that the APR and MAPR would be confusing to borrowers, which was not Congress' intent. After a first blush of the final rule, spokesperson Jennifer Sadler added, "Bottom line is very minimal impact, if at all, on Navy Federal."
In the final rule, DoD recognized the potential for confusion but that it was the department's duty to ensure its military personnel and their families are properly informed, including providing financial education as part of their training.
The APR and MAPR disclosures must be provided orally and in writing. The rule has a sample form lenders can use to help determine whether a borrower is covered or not. This also includes a safe harbor that if a borrower says they are not covered and provides no other evidence of coverage, the credit union can proceed assuming they are not. However, if the borrower says they are not covered but submits documentation as part of the loan process that shows otherwise, the safe harbor vanishes.
NCUA and the other federal financial regulators were consulted in the rulemaking as required by law. They will also have enforcement authority; DoD is working with state regulatory agencies to determine how to enforce the new rule for nonbank lenders and other creditors.
"NCUA was pleased to have input to this important rulemaking process, particularly since it represents a step in the right direction to eradicated predatory lending practices aimed at our servicemembers," Director of Public and Congressional Affairs John McKechnie said. "Chairman Johnson took a high degree of interest in the legislative process last year and was similarly involved during the regulatory phase."
"I am pleased with the end product and appreciative of the Department's efforts," Defense Credit Union Council President Arty Arteaga stated. "Their rule focuses on predatory lending practices and predatory lenders, and in essence steers clear of mainstream financial institutions and cooperatives, such as defense credit unions who since 1928 have done a remarkable job supporting the financial needs our troops and their families."
Noting initial industry concerns that the DoD could craft an overly broad regulation, CUNA Deputy General Counsel and Senior Vice President of Regulatory Advocacy Mary Dunn said, "All things considered, the rule is very fair and well constructed."
NAFCU President/CEO Fred Becker also highlighted the narrow focus of the new rule. "The final regulation provides consumer protection while balancing the need to provide military families with the financial services they require," he said.
Becker added, "We also appreciate the Department's recognition of credit unions' positive contribution in developing credit products designed to assist service members. Credit unions have a long standing tradition of going above and beyond the call of duty in serving our men and women in uniform and we will continue to battle at the front lines in the war against unscrupulous lending practices, particularly those that exploit military personnel."
"NASCUS and state regulators worked closely with DoD throughout the rulemaking process, providing both written comment letters and the expertise of state regulators on military consumer lending issues," NASCUS President/CEO Mary Martha Fortney commented.
"NASCUS recognizes that the state regulatory perspective was considered in the rulemaking process and we are pleased that our suggestions were incorporated into the final rule. NASCUS and state regulators continue to be available to the DoD as they move forward in this process." She added that NASCUS also is working to meet with DoD to discuss implementation.
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