According to an announcement posted on the Military Lending Act (“MLA”) Website,
“[b]etween February 9, 2017 and February 15, 2017 there was a problem with MLA Multiple Record Requests that prevented 149 request files from processing.” The Defense Manpower Data Center advises any creditor who, during the time period in question, submitted a Multiple Record Request file that failed to process submit the file again for processing.

Under the Department of Defense (“DoD”) final rule, using information obtained directly or indirectly from the DoD’s MLA Website is one of the safe-harbor methods for conclusively determining whether a credit applicant is a covered borrower eligible for MLA protections. (A safe harbor is also available to a creditor that uses a consumer report from a nationwide consumer reporting agency.) Users of the MLA Website can retrieve information on one individual via a Single Record Request or on multiple individuals (or multiple dates for a single individual) via a Multiple Record Request, or “batch” request.

The MLA Website is an important compliance resource for creditors, who face serious penalties and remedies for MLA violations. As a practical matter, to protect against file generation failures, creditors might wish to consider establishing backup arrangements with a consumer reporting agency to determine covered-borrower status for MLA purposes.

The CFPB announced that it has entered into a consent order with Military Credit Services, LLC, a company providing revolving credit to military consumers, to settle allegations that the company’s open-end credit agreements violated the Truth in Lending Act and the Electronic Fund Transfer Act.  MCS had entered into a consent order with the CFPB in 2014 to settle a complaint that named several other companies as defendants, including Freedom Stores, Inc. (Freedom), a retailer catering to military customers that offered financing through retail installment contracts.  While that complaint charged MCS with TILA violations similar to those described in the new consent order, it only charged Freedom with similar EFTA violations.  Nevertheless, the 2014 consent order required all defendants to ensure that their contract provisions included required EFTA disclosures and required TILA account-opening disclosures.

According to the new consent order (whose findings of fact and conclusions of law are not admitted or denied by MCS), the provision in MCS’s revolving credit agreements that authorized electronic payments were not “clear and understandable” as required by the EFTA and Regulation E.  The consent order also states that the credit agreements violated TILA and Regulation Z because they did not include all required account-opening disclosures in the required form, such as the APR that corresponds to each periodic rate that may be used to compute the finance charge.

The consent order requires MCS to pay a $200,000 civil money penalty and ensure that its contracts comply with EFTA/Regulation E and TILA/Regulation Z disclosure requirements.  MCS must also hire an independent consultant “with specialized experience in consumer-finance compliance” and who is acceptable to the CFPB to review the company’s issuance and servicing of credit.  The purpose of the review is to determine whether MCS has updated its contracts for compliance.  The company must develop a compliance plan to correct any deficiencies identified by the consultant and provide the report and compliance plan to the CFPB for a determination of non-objection.

On November 18, the GAO released a report examining issues related to implementation of the Servicemembers Civil Relief Act (SCRA) interest rate cap for student loans. The Senate Committee on Homeland Security and Governmental Affairs requested the report in response to indications that servicemembers with student loans who are eligible for an SCRA rate reduction may not always be receiving the benefit. (The SCRA requires creditors and servicers to reduce the interest rate to 6 percent during active-duty service on any pre-service obligation or liability, including student loans.) The GAO report concluded that servicemembers with private student loans may be particularly at risk of not receiving a rate reduction because nonbank private student loan lenders and servicers are subject to neither the same rules nor oversight as those of federal student loans and commercial FFEL student loans (FFEL loans made by private and state lenders that are not owned by the Department of Education). For example, unlike for federal and FFEL loans, servicers of private student loans are not required to identify eligible borrowers and automatically apply the rate cap. Additionally, no agency is currently authorized to routinely oversee SCRA compliance for private student loans made or serviced by nonbank lenders and servicers, such as private companies and institutions of higher education.

In its report, the GAO made a number of recommendations to ensure consistent treatment of eligible servicemembers across all types of student loans. In particular, the GAO recommended that the CFPB coordinate with the DOJ “to determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers,” including developing a legislative proposal to seek additional statutory authority to facilitate such oversight, if necessary.

In its written comments to the report, the CFPB acknowledged that it “shares the GAO’s interest in maximizing the effectiveness of [the] SCRA’s protections” and highlighted the tools currently at its disposal to facilitate SCRA enforcement, such as its collection of SCRA-related consumer complaints and ability to refer potential SCRA violations to the DOJ. Nevertheless, the GAO maintained that the existing tools are insufficient and additional interagency coordination is necessary to close the gap in SCRA oversight.

Yesterday, the FTC announced the launch of a redesigned Military Consumer website as part of its joint initiative with the DoD, CFPB and others. Military.Consumer.gov is a financial readiness website designed to help servicemembers and their families navigate consumer decisions and protect against fraud. The website also provides tools for personal financial managers, counselors, and others in the military community to promote financial education. To facilitate navigation and utility, the website has been optimized for use on a mobile device and updated with “quick, mobile-friendly tips” for servicemembers to access on the go.

A new CFPB report, “A snapshot of servicemember complaints,” focuses on issues related to VA mortgage refinancing.

The report indicates that as of November 1, 2016, the CFPB had received over 12,500 mortgage complaints from servicemembers, veterans, and their dependents.  The CFPB determined based on a key word search of complaint narratives that approximately 18% (about 1,800) of those complaints concern refinance issues.

According to the report, the issues raised in the complaints involve aggressive solicitations, misleading advertisements, and “failed promises” due to processing delays that caused rate locks to expire or otherwise resulted in less favorable terms than expected; a lack of clarity regarding underwriting requirements to obtain a loan; and poor communications causing consumer confusion about changes to monthly payments and escrows.

On October 17, the FDIC released revised interagency Military Lending Act (MLA) examination procedures for use in connection with consumer credit transactions occurring on or after October 3, 2016. The revised procedures reflect the Department of Defense’s July 2015 final rule and August 2016 interpretive rule and appear consistent with those released by the CFPB and FFIEC last month.

The FDIC also provided guidance on its initial supervisory expectations for examinations relating to MLA compliance. Echoing the words of the CFPB, the FDIC stated that early examinations will focus on financial institutions’ “compliance management systems and overall efforts to come into compliance” with the MLA final rule, and that “examiners will consider an institution’s implementation plan, including actions taken to update policies, procedures, and processes; its training of appropriate staff; and its handling of early implementation challenges.”

Considering the NCUA’s instruction to examiners earlier this month to accept a credit union’s “reasonable and good faith efforts” to comply with the MLA final rule, and the OCC’s Bulletin issued on October 7th, which used language similar to the CFPB regarding initial supervisory expectations, the FDIC has joined what appears to be a growing list of regulators to follow the CFPB’s lead and take a modified approach to early examinations for MLA compliance.

Compliance with the MLA final rule was required for most consumer credit products as of October 3, 2016. For credit extended in a new credit card account under an open-end consumer credit plan, compliance is not required until October 3, 2017.

The CFPB announced that it has entered into a consent order with Navy Federal Credit Union to settle allegations that the credit union engaged in unfair and deceptive collection practices in violation of the Consumer Financial Protection Act.  The consent order, which appears to be the CFPB’s first consent order involving a credit union, requires Navy Federal to pay a civil money penalty of $5.5 million.

According to the CFPB’s findings of fact and conclusions of law set forth in the consent order (which Navy Federal does not admit or deny), the credit union is alleged to have engaged in the following unlawful conduct:

  • The credit union sent letters to members threatening to take legal action unless they made a payment but, in reality, seldom took legal action, with the CFPB finding that the credit union’s “pay or be sued” message “was inaccurate about 97% of the time, even among consumers who did not make a payment in response to the letters.”
  • In addition to making similar threats of legal action in telephone calls, the credit union threatened to garnish members’ wages when it had no intention to do so.
  • The credit union threatened in letters and telephone calls to contact a member’s commanding officer if he or she did not promptly make a payment when it had no intention to do so.  In addition, the credit union would not have been authorized to make such contacts because the provision in the credit union’s agreements that purported to authorize the credit union to disclose a servicemember’s debts to his or her commanding officer “was not consented to by consumers because the contract clause was buried in fine print, non-negotiable, and not bargained for by consumers.”  Because the credit union was not authorized to contact a member’s commanding officer and did not intend to do so, its threats to members were deceptive in violation of the CFPA’s prohibition of unfair, deceptive, or abusive acts or practices.
  • The credit union sent letters to members who had fallen behind on their loans that stated the member “would find it difficult, if not impossible, to obtain additional credit because of your present unsatisfactory credit rating” with the credit union and that the member could repair his or her credit by calling the credit union.  The credit union had no basis for its assertions regarding the member’s ability to obtain additional credit and misleadingly implied that the credit union issued a credit rating as would a credit reporting agency and that it offered credit repair services.
  • The credit union froze electronic account access and disabled certain electronic services after consumers became delinquent on a credit product without adequately disclosing this policy to consumers when an account was opened or when the consumer became delinquent.

The CFPB’s finding that members had not consented to the provision authorizing the credit union to contact a member’s commanding officer because it was “buried in fine print, non-negotiable, and not bargained for” could be used to invalidate many provisions contained in consumer contracts.  We are unaware of any terms in consumer contracts that are ever negotiated.  Is the CFPB suggesting that a company may no longer use form contracts?  While we doubt that they intended to send that message, the consent order seems to say that it is unlawful to include a provision in a form contract if the provision is in “fine print.”  Under what circumstances will the print be considered “fine print”?  Must there be a minimum font size?  Finally, to what contract provisions does this “new rule” apply?  Does it apply to all provisions or just those that consumers or the CFPB deem important?  The consent order appears to be another example of the CFPB’s practice of “rulemaking by consent order.”

In addition to payment of the $5.5 civil money penalty, the consent order requires the Navy Federal to pay $23 million in redress to consumers who, between January 1, 2013 and the date of the consent order, made a payment to the credit union within 60 days of receiving an allegedly deceptive debt collection letter or received a letter threating to communicate with the consumer’s commanding officer. The credit union is also prohibited from continuing to engage in the practices that are the subject of the consent order, must remove any references to contacting employers, including military employers from its consumer-facing disclosures and agreements, and can no longer restrict electronic account access in the event of delinquencies or overdrafts.

 

According to an announcement posted on the Servicemembers Civil Relief Act Website“[a] bug in the SCRA website is causing the site to give false negatives for some National Guard members whose service should be positively reported by the site.”  The DMDC advises that it is working to resolve the issue, but that a fix will not be in place until at least the evening of Thursday, October 6.  

In the meantime, as a practical matter, it is virtually impossible for lenders to verify that they are in compliance with the SCRA.  In these circumstances, it would be prudent for creditors to consider putting a temporary hold on all collection activities against individuals until the issue is resolved and to advise their counsel and other vendors enaged in collection activities accordingly.

 

The Department of Defense (DoD) has issued an interpretive rule to assist the industry in complying with its July 2015 final rule amending the Military Lending Act’s implementing regulation.  The much-anticipated guidance was published in the Federal Register on August 26, 2016, just over one month before the final rule’s October 3 compliance deadline for most products other than credit cards.

The DoD consulted with the CFPB in developing the final rule, and the CFPB actively supported the DoD’s plans to expand MLA coverage.  The CFPB has authority to enforce the MLA against lenders as to whom it has TILA enforcement authority and can examine lenders as to whom it has supervisory authority for MLA compliance.

On September 20, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the interpretive rule: “The DoD’s 11th Hour Interpretive Rule For New MLA Rules.”  More information about the webinar and the registration form is available here.

The interpretive rule consists of a series of 19 questions and answers that, according to the DoD, “represent official interpretations of the Department.”  The DoD also states that the interpretive rule “provides guidance on certain questions the Department has received regarding compliance with the July 2015 Final Rule” and “does not substantively change the regulation implementing the MLA, but rather merely states the Department’s preexisting interpretations of an existing regulation.”  In connection with the interpretive rule, the American Bankers Association (ABA) has made suggestions to representatives of the CFPB, Fed, OCC and FDIC for how the agencies can use their examination procedures to facilitate MLA compliance.  Several of those suggestions are noted below.

Highlights of the interpretive rule include the following:

  • Scope of purchase money exception.  The MLA rule exempts a credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.  The interpretive rule states that the exception is limited to a loan that finances “only the acquisition of personal property” and does not apply to a “credit transaction that provides purchase money secured financing of personal property with additional ‘cash out’ financing.”  The ABA suggests that examiners “should distinguish attempts to circumvent the MLA rule through phony ‘secured’ transactions from legitimate secured loans that include financing for incidental expenses related to the underlying purchase, such as shipping and delivery charges, taxes, warranties, and other services directly connected to the transaction.  Therefore, the latter loans would qualify for the exemption so long as they meet the regulatory requirements for exclusion (i.e., are expressly intended to finance the purchase of the personal property and are secured by the personal property being purchased).”  The ABA believes this approach should also apply to “vehicle” purchase loans.
  • Oral disclosures.  The MLA rule requires a creditor to provide to a covered borrower, before or at the time the borrower becomes obligated on the transaction or establishes an account for consumer credit, a clear description of the covered borrower’s payment obligation.  A creditor can satisfy this requirement by providing the information orally in a payment schedule or account-opening disclosure.  The interpretive rule states that “an oral recitation of the payment schedule or account-opening disclosure is not the only way a creditor” can comply.  It provides that a creditor “may also orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow.”  The interpretive rule also states that “a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.”
  • Prohibited terms.  The MLA rule makes it unlawful for a creditor to extend consumer credit to a covered borrower pursuant to a credit agreement that includes certain terms, such as a mandatory arbitration provision.  The interpretive rule states that a creditor can use a single credit agreement for both covered and non-covered borrowers, provided that “the agreement includes a contractual ‘savings clause’ limiting the application of the proscribed term to only non-covered borrowers, consistent with any other applicable law.”
  • MAPR 36 percent limit.  The MLA rule prohibits a creditor from imposing a military annual percentage rate (MAPR) greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit.  The interpretive rule recognizes that a covered borrower’s use of an open-end account could result in fees and/or periodic charges that would cause the MAPR to exceed 36 percent.  It states that “nothing in [the MLA rule] prohibits a creditor from complying by waiving fees or finance charges, either in whole or in part, in order to reduce the MAPR to 36 percent or below in a given billing cycle.”
  • Limitation on use of checks and other access methods.  The MLA rule prohibits a creditor from extending consumer credit to a covered borrower with respect to which the creditor uses a check or other method of access to a deposit, savings,or other financial account maintained by the covered borrower.  The interpretive rule states that the prohibition makes it unlawful for a creditor to use a borrower’s account information to create a remotely created check or remotely created payment order to collect payments or to use a post-dated check provided at or around the time that credit is extended.  It provides that the prohibition does not prevent a covered borrower from tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor (including authorizing automatically recurring payments in compliance with the EFTA and Regulation E) or from granting a security interest to a creditor in the covered borrower’s checking, savings or other financial account. The interpretive rule further provides that the prohibition does not prevent a creditor from exercising a statutory right under federal or state law to take a security interest in funds deposited in a covered borrower’s account.   The ABA suggests that MLA examination procedures make clear that there is no limit on the timing of when a creditor can take a security interest.
  • Safe harbor for assignees.  The MLA rule provides a safe harbor for a creditor that determines a consumer’s military status using the DoD database or a credit report.  The interpretive rule states that the safe harbor extends to a creditor’s assignee “provided that that the assignee continues to maintain the record created by the creditor that initially extended the credit.”

In addition to providing suggestions for MLA examination procedures, the ABA, joined by six other prominent industry trade groups, recently wrote to the CFPB and federal banking agencies (Fed, OCC, FDIC, NCUA) seeking to postpone by six months the date on which examiners will begin transactional testing of depository institutions for compliance with the MLA final rule.