NAFCU Compliance Blog

Should Credit Unions Photocopy Identification Cards?

Written by Shereefat Balogun, Regulatory Compliance Counsel

So last week, I attempted to take some cash out of my credit union’s ATM but the customer in front of me had a bunch of checks she had to deposit and took forever.  I decided to walk into the branch and ask for the cash withdrawal.  The teller asked me for my driver’s license or any similar ID. I told her that I did not have any ID on me (don’t judge me!), but I had my ATM/debit card.  The teller said she would be able to process my request only if the credit union had a copy of my ID on file.  While I understood the benefits of having the copy on file, I could not help but to think about the different compliance issues this raises.  Yes, the copy of the ID is great for verifying your members’ identity or helping to detect fraud.  However, it got me thinking about compliance issues relating to IDs, such as military IDs and fair lending concerns.  Contrary to what we’ve been taught, what’s good for the goose is NOT always good for the gander. 

Bank Secrecy Act and CIP Recordkeeping

The Bank Secrecy Act requires a credit union to know its member (KYC or KYM whichever lingo you prefer) and have a customer identification program (CIP). This includes checking a government identification number, which can be done with documentary evidence like an ID.  So collecting the ID to verify the information is one thing.  But should a credit union keep a copy of the ID in its records?  For recordkeeping purposes, the CIP rule leaves it up to the credit union to determine how it wants to document verification that has been performed.  Generally, the rule requires a credit union to retain a description of the document that was relied on, noting the type of document, any identification number contained in the document, the place and date of issuance, and expiration date.  So, a description is generally sufficient.  Though the credit union may retain a copy of the ID, it certainly is not required.  See, 31 C.F.R. §1020.220(a)(3)(i)(B).  This is also confirmed in FinCEN’s Guidance on Customer Identification Regulations FAQs:

2. Can a bank keep copies of documents provided to verify a customer’s identity, in addition to the description required under 31 C.F.R. § 103.121(b)(3)(i)(B), even if it is not required to do so?

Yes, a bank may keep copies of identifying documents that it uses to verify a customer’s identity. A bank’s verification procedures should be    risk-based and, in certain situations, keeping copies of identifying documents may be warranted. In addition, a bank may have procedures to keep    copies of documents for other purposes, for example, to facilitate investigating potential fraud…

(Emphasis added.)

Keep in mind though, that although there are no federal regulations prohibiting a credit union from photocopying ID, some states prohibit photocopying IDs.  Be sure to check with your individual state law to see if there are any limitations here.

But wait…what about military IDs?  Good question!  While a credit union may use a military ID to collect identifying information for CIP purposes and other purposes, it cannot copy the ID for CIP purposes.  Federal law generally prohibits the copying or scanning of military ID:

Whoever manufactures, sells, or possesses any badge, identification card, or other insignia, of the design prescribed by the head of any department or agency of the United States for use by any officer or employee thereof, or any colorable imitation thereof, or photographs, prints, or in any other manner makes or executes any engraving, photograph, print, or impression in the likeness of any such badge, identification card, or other insignia, or any colorable imitation thereof, except as authorized under regulations made pursuant to law, shall be fined under this title or imprisoned not more than six months, or both.

(Emphasis added.)

As stated above, photocopying military ID can subject a person to fines and imprisonment up to 6 months.  If your BSA/CIP program permits the photocopying of military ID identification, you may want to reassess your CIP requirements. 

To emphasize, the statute prohibits the photocopying the military identification card.  For CIP purposes, it’s our understanding that some credit unions document information found on the military ID since they are unable to make a copy.  This practice is consistent with the CIP recordkeeping requirement discussed above. 

Fair Lending Concerns

So we’ve established that it is customary to collect and retain a copy of a driver’s license for CIP purposes.  However, for purposes of Regulation B and other fair lending laws, credit unions may want to keep that copy out of the member’s loan application file.  For example, Regulation B prohibits financial institutions from considering certain information when evaluating an application and making a credit decision.  Indeed, the FinCEN FAQ highlighted above also warned:

Nonetheless, a bank should be mindful that it must not improperly use any document containing a picture of an individual, such as a driver’s license, in connection with any aspect of a credit transaction.

(Emphasis added.)

Regulation B and Regulation C require a credit union to collect certain information for monitoring purposes.  For instance, Regulation B requires a credit union that receives a credit application to collect certain information, such as ethnicity, sex, and age.  See, 12 C.F.R. §1002.13(a).  Similarly, Regulation C requires a credit union to collect certain data in relation to applications for home purchase loans, home improvement loans, and refinancings.  This information includes information about the ethnicity, race, and sex of the applicant or borrower.  See, 12 C.F.R. §1003.4(a)(10).  When collecting this information, a credit union may list questions regarding the ethnicity, race, and sex of the applicant on the loan application form, or on a separate form that refers to the application.  See, Appendix B to 12 C.F.R. Part 1003.

Although neither rule explicitly instructs credit unions to refrain from maintaining a copy of a driver’s license from a loan file, doing so may increase your fair lending risks, and may lead to examiner scrutiny.

As always, if you have any questions about this blog or any other compliance issue, please feel free to reach out to NAFCU’s Regulatory Compliance Team.  We’re here for you!

DoD’s Interpretive Guidance on MLA: Part III – Definition of "Vehicle"

Written by Shereefat Balogun, Regulatory Compliance Counsel

Earlier this summer, my colleague Stephanie Lyon wrote about the DOD’s failure to define some critical terms in the rule, namely: “vehicle”, dwelling”, and “personal property”.  As she explained, these definitions matter, as they helps us determine which loans are included in the MLA’s scope.  Well we have some good news- the DOD’s Interpretive Guidance defined one of those terms- "vehicle".  That said, the guidance does fall short and still leaves some questions unanswered. 

As we all know, there are a few credit transactions which are exempt from the MLA rule.  For purposes of this article, those include:

• Residential mortgages, meaning “any credit transaction secured by an interest in a dwelling,” including loans to finance the purchase or initial construction of a dwelling, a refinance, a HELOC or reverse mortgage;
• Loans that are expressly intended to finance the purchase of a motor vehicle or personal property, where the credit is secured by the vehicle or property being purchased;

See, 32 C.F.R. §232(f)(2).

The Interpretive Guidance released a few weeks ago “clarified” the definition of “vehicle” and specifically excluded motor homes, recreational vehicles (RVs), golf carts, and motor scooters from the definition.  Meaning, they are not exempt from the MLA as a “motor vehicle”.  Here is the question and answer on the issue, taken out of the guidance:

19. Under 32 CFR 232.3(f)(2)(ii) and 232.8(f) what methods of transportation are included within the definition of a “vehicle”?

Answer: For purposes of the MLA, the term “vehicle” means any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation. The term does not include motor homes, recreational vehicles (RVs), golf carts, or motor scooters.

Thanks DOD!

However, this “clarity” leads to a new question- if they’re not considered vehicles, what are they? Are these considered “personal property?”  Well we still don’t know, because we still don’t have a definition for “personal property”.  If these are considered personal property, this begs another question.  Why would the DOD bother to exclude boats, RVs, etc., from the definition of “vehicle”, just to include them as “personal property” and have them exempted under 232.3(f)(2)(iii)?  This is rather perplexing.

Or would they be considered a “dwelling”?  The exception for a residential mortgage requires that the credit be “secured by an interest in a dwelling”.  While the rule seems to contemplate that a dwelling-secured interest is involved in order for the residential mortgage exception to apply, we still don't have a definition for "dwelling".

As explained above, even with the recently published interpretive guidance, there are still a lot of gray areas.  Because of the ambiguity that remains with this category of loans, credit unions are strongly advised to consult with counsel.  Indeed, state law may provide helpful guidance.  Thus, having counsel familiar with your state’s property law may help avoid some of the risks associated with the ambiguity left by the rule.  For example, it is common for states to categorize property as “real property” meaning secured by land, and “personal property” which is often a catch-all for all other property, meaning non-real property.

NAFCU’s Regulatory Compliance Team is continuing to review the guidance to understand its full impact on credit unions and will make necessary updates to our Military Lending Act Guide in the coming weeks. Currently available resources can be found here at our MLA Compliance landing page.

Searching for the Missing MLA Definitions

Written by Stephanie Lyon, Regulatory Compliance Counsel

If you are like me, you love definitions. Definitions help me group things together and differentiate between what is covered and what is outside the scope of a rule. As many of you know, the Department of Defense (DoD) recently revised their 2007 Military Lending Act Rule (old MLA Rule). However, a couple of definitions that were a part of the old MLA Rule did not make it into the 2015 MLA Rule (revised MLA Rule). Other terms were never defined by DoD, adding to the rule’s ambiguity. Some of the most noticeable definitions that are missing in both the preamble and the text of the 2015 MLA Rule are: “motor vehicle” and “personal property.” As for those terms never defined, “structure” tops the list.

 

Why do these missing definitions matter? For starters, the rule excludes certain consumer loans from its scope and thus exempt from the protections of the revised MLA Rule. The definition of motor vehicle, dwelling and personal property is imperative when determining which loans are covered and which ones are excluded. Under the revised MLA Rule, “consumer credit” does not include:

• Residential mortgages, meaning “any credit transaction secured by an interest in a dwelling,” including loans to finance the purchase or initial construction of a dwelling, a refinance, a HELOC or reverse mortgage;
• Loans that are expressly intended to finance the purchase of a motor vehicle or personal property, where the credit is secured by the vehicle or property being purchased.

See, 32 C.F.R. § 232.3(f)(2).

The type of collateral securing the loan is one driving factor as to whether or not it is a covered loan under the revised MLA Rule, but the terms for different kinds of collateral are not always defined. Let’s start with what is defined – “dwelling” was interpreted rather broadly in section 232.3(k):

“(k) Dwelling means a residential structure that contains one to four units, whether or not the structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and manufactured home.”

Note that a dwelling does not need to be “attached to real property” which does provide more flexibility in terms of which loans will qualify for the “residential mortgage” exception. However, there does not seem to be any exemption that would apply to a land-only loan.

As for motor vehicles and personal property, DoD did not define these terms. Because the revised MLA Rule excludes loans to purchase a motor vehicle or personal property, credit unions want to know what those terms include. Could this be a loan to purchase a motorcycle, RV, boat, ATV or similar collateral? And if the member lives in the collateral, could it qualify for the residential loan exemption?

For instance, take the purchase of a boat, the category in which the boat falls would determine whether the loan will be a covered loan or excluded. Because there is no definition for a motor vehicle or personal property, a boat could potentially fall under either group. What may be more complicated is if a houseboat is a “dwelling” and thus a residential loan not covered by the revised MLA Rule. See, 32 C.F.R. § 232.3(f)(2)(i)-(iii). This may come down to whether a houseboat could be viewed as a “structure” since that is how the definition of dwelling is framed. Hence a simple boat loan refinance could become a nightmare when determining if the loan falls under the protections of the revised MLA Rule or the exemptions. Fortunately, the scheme is not as complicated for purchase transactions as it appears that a boat could fall under the exclusion as either a motor vehicle, personal property, or a dwelling.

So where can credit unions seek the answer to this dilemma? There are some persuasive sources out there that could help shed light on this messy issue. The old MLA rule for example, discussed the definition of motor vehicles as “vehicles which must be registered pursuant to state law.” While this provision was not preserved in the revised MLA Rule, states generally regulate the use of motor vehicles. Similarly, property law is largely state law, so that may inform what collateral is considered “personal property” or even what might be considered a “structure” for determining the category of a dwelling.

The issue with relying on state law is that there may not be uniformity across jurisdictions, which is challenging especially for credit unions that operate in multiple states. For example, a loan made in California may be considered a covered loan while the same loan made in a state that defines motor vehicles, personal property, or structure differently may not. These inconsistencies may add to the regulatory burden experienced by credit unions that have expansive presences to the point of being disruptive to their lending process.

Overall, the revised MLA Rule is fertile ground for litigation and there are a lot of gray areas if the credit union should unfortunately find itself in court. Hence, credit unions may want to speak to their local counsel to find out more information on what category loans would fall into in the absence of definitions.

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DoD Military Lending Act Interpretive Guidance Released

The DoD published its interpretative guidance on August 26, 2016 in the Federal Register that may have changed our analysis. NAFCU's Regulatory Compliance team will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.

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Coming Soon: Updated MLA Compliance Guide –  While NAFCU's MLA Compliance Guide is still fairly new, our members keep asking great questions that we wanted to incorporate into the guide. NAFCU members should keep an eye out for a revised edition soon, we’ll keep you posted. The current edition is available here.

CFPB Releases Monthly Complaint Report and Notes Debt Collection, Mortgage, and Credit Reporting as Top Complaints; DMDC Extends MLA Database Deadline; Free Webcast - Breaking Down the NCCO Exam

Written by Shereefat Balogun, Regulatory Compliance Counsel

On January 28, 2016, the CFPB released its Monthly Complaint Report for December 2015, which provides a high-level snapshot of trends in consumer complaints. It is important to keep in mind that credit unions under $10 billion are not included in the Consumer Complaint Database, which forms the basis of the monthly reports. Notwithstanding, the reports can be a useful tool, as they can help credit unions evaluate which products and services are more problematic and thus, should be addressed in order to avoid or mitigate regulatory risks.

As of January 1, 2016, the CFPB has handled about 790,000 consumer complaints, including approximately 20,3000 complaints in December 2015. The Report notes that:

• Complaints related to prepaid products rose from 138 complaints between October- December 2014 to 459 complaints between October-December 2015, representing a 233% increase;

• For the 28^th consecutive month, the CFPB handled more complaints about debt collection than any other type of complaint. Debt collection complaints represented about 31% of complaints in December 2015.

• Debt collection, mortgage, and credit reporting complaints continue to be the top three most-complained-about consumer financial products and services, which together represented 68% of all complaints submitted in December 2015.

• Equifax, Transunion, and Experian were the most-complained-about companies for August-October 2015.

As stated previously, credit unions under $10 billion are not included in the Consumer Complaint Database.  Rather, the CFPB will forward any complaints from these credit unions to NCUA, and credit unions will need to follow NCUA's procedures for responding to member complaints.

You can view the CFPB’s Monthly Complaint Report here: http://files.consumerfinance.gov/f/201601_cfpb_monthly-complaint-report-vol-7.pdf

You can view the CFPB’s Consumer Complaint Database here: http://www.consumerfinance.gov/complaintdatabase/

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MLA Database Update. As NAFCU reported earlier this week, DMDC agreed to extend the deadline to seek direct access to the MLA database until February 15, 2016. Those credit unions who express interest in the direct connect option will receive a questionnaire in a response email. DMDC set a February 19, 2016 deadline for interested credit unions to complete and return this questionnaire. If you have any questions about this deadline or the database, please email Brandy Bruyere, NAFCU’s Director of Regulatory Compliance, [email protected].

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Free Webcast - Breaking Down the NCCO Exam

Live Webcast: Tuesday, February 9 | 3:00 p.m. – 4:00 p.m. EST

As a serious compliance professional, you either have, or are thinking about earning, your NAFCU Certified Compliance Officer (NCCO) designation. This challenging but comprehensive exam will prove that you have a solid understanding of the major regulations that govern credit union operations. Join this free webcast for an in depth look at how to best prepare for the NCCO exam and utilize the material. NAFCU’s very own Director of Regulatory Compliance and Director of Education will guide you through learning the best approach for earning this prestigious designation.

DoD Final Rule: Treatment of fees under MLA & Regulation Z; Programming Note; NAFCU Webcast.

Written by Alexander Monterrubio, Regulatory Affairs Counsel

Happy Friday to all! My name is Alexander Monterrubio and I am part of NAFCU's Regulatory Affairs team. Before you start your Labor Day weekend, let’s take a second to talk about an increasingly popular subject among lending circles… the recently finalized Military Lending Act (MLA) regulation. [Director's editorial note--what Alex is trying to say is, sorry for the really long blog post leading into a holiday weekend! ~Brandy]

This post is going to primarily focus on the charges included in calculating the Military Annual Percentage Rate (MAPR) as compared to the charges included in Regulation Z’s Annual Percentage Rate (APR).

Regulation Z contains the rules for determining which fees are included in the finance charge to be used when calculating the APR for a consumer credit transaction. In particular, 12 C.F.R. § 1026.4 and its Official Interpretations provide examples of charges that are always included, charges that are included unless conditions are met, and charges that are always excluded. Meanwhile, the Department of Defense’s (DoD’s) final rule modified the MLA to reflect an “all-inclusive” MAPR that is more expansive than Regulation Z. This different approach taken by the MLA causes a stark contrast between how a particular type of fee is treated under the respective rules.

Application Fees

Generally, Regulation Z excludes application fees if charged to all applicants for credit. See, 12 C.F.R. § 1026.4(c)(1). The Official Interpretation defines an application fee as a charge to recover the costs associated with processing applications for credit, such as credit reports, credit investigations, and appraisals. However, if the fee is only charged to applicants who are approved or who actually receive credit, then the application fee may not be excluded from the finance charge.

Under the MLA, “any application fee charged to a covered borrower who applies for consumer credit” is included in the MAPR, except for a bona fide fee charged to a credit card account. See, 32 C.F.R. § 232.4(c)(1)(iii)(B). While there is not a broad exemption like in Regulation Z, the final rule does contain an important caveat:  a federal credit union or an insured depository institution may now exclude from the MAPR an application fee charged to a covered borrower when making a short-term, small amount loan (STS loan). However, this exemption is limited to one application fee charged in a rolling 12-month period.

Participation Fees

Under Regulation Z, a participation fee is generally excluded from the finance charge. See, 12 C.F.R. § 1026.4(c)(4). However, keep in mind that a one-time, non-recurring fee charged during the opening of the account is not a fee that is charged on a periodic basis and may not be excluded from the finance charge as a participation fee. Regulation Z’s participation fee exemption also does not apply to minimum monthly charges, credit card non-use charges, or other fees based on account activity or the amount of available credit.

Under the MLA, “any fee imposed for participation in any plan for consumer credit” is included in the MAPR, except for a bona fide fee charged to a credit card account. See, 32 C.F.R. § 232.4(c)(1)(iii)(C).  The final rule explains that the bona fide fee for participating in a credit card account may be “reasonable” if the fee amount corresponds to either the credit limit in effect or the credit made available when the fee is imposed, the services offered under the credit card account, or other factors relating to the credit card account. See, 32 C.F.R. § 232.4(d)(3)(iv)  For example, even if other creditors typically charge $100 per year participation fee for credit card accounts, a $400 per year participation fee may still be reasonable if (relative to the other accounts) the credit made available to the covered borrower is significantly higher or additional services and benefits are provided under that account.

Insurance Premiums/Debt Cancellation or Suspension Fees

Regulation Z excludes premiums for credit life, accident, health, or loss-of-income insurance from the finance charge so long as certain conditions are met:

(1) The insurance coverage is not required by the creditor, and this fact is disclosed in writing;

(2) The premium for the initial term of insurance coverage is disclosed; and

(3) The consumer signs or initials an affirmative written request for the insurance after receiving the required disclosures. See, 12 C.F.R. § 1026.4(d)(1).

These conditions generally aim at ensuring the consumer voluntarily purchased the coverage before allowing the charge to be excluded from the finance charge.

Similar to insurance premiums, Regulation Z excludes debt cancellation or debt suspension fees so long as specified conditions are met. See, 12 C.F.R. § 1026.4(d)(3). These conditions are similar to the above conditions for insurance premiums with one additional disclosure related to notifying the consumer that interest will continue to accrue during the suspension period even though the obligation to pay is suspended.

Under the MLA, premiums for credit life, accident, health, or loss-of-income insurance and debt cancellation or debt suspension fees are included in the MAPR regardless of the voluntary nature of the purchase by the covered borrower. See, 32 C.F.R. § 232.4(c)(1)(i).The DoD changed this aspect of the regulation under the reasoning that credit insurance and debt suspension products provide coverage for conditions that a covered borrower, as a member of the armed services, is already “substantially insured for, or otherwise substantially provided benefits for, by the military service.” In other words, these products are included in the MAPR because the DoD views them as duplicative, providing no substantial utility to covered borrowers.

Conclusion

It is safe to say that the DoD’s intention was to cast as wide a net as possible when capturing fees to be included in the MAPR and a charge that is included in the definition of a finance charge under Regulation Z would likely also be included in MAPR calculations. However, it is important to emphasize that a charge excluded from the definition of finance charge under Regulation Z is not necessarily excluded from the MAPR.

For more information about the MLA final rule, check out the September issue of NAFCU’s Compliance Monitor.

The following chart is intended to be a helpful quick reference guide to assist you in identifying how charges are treated under each regulation. This is not intended to be a comprehensive list.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Monday for the long holiday weekend. We will be back to blogging on Wednesday. Have a great Labor Day weekend!

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NAFCU Webcast. Join us on Wednesday, September 16 from 2PM until 3:30 PM EST for Credit Union Mergers: Pros, Cons, Do's and Dont's. A merger can be considered an opportunity or challenge for your credit union. As a top executive and decision maker, it’s important to understand the best practices for a successful merger. Whether you’re the merging or surviving credit union, you have to consider important aspects that may make or break your final decision to merge. Learn the pros and cons and prepare yourself and your team with this webcast.

DOD Finalizes the MLA Rule

Written by Eliott C. Ponte, Regulatory Compliance Counsel

On Tuesday, the Department of Defense (DOD) finalized comprehensive changes to its rules that implement the Military Lending Act (MLA).  Changes to these rules affect credit unions who offer certain credit products to active servicemembers or their dependents.  The new rules become effective on October 1, 2015, but compliance is not required until October 3, 2016.  Changes that affect credit cards, however, are delayed until October 3, 2017, with the possibility that the delay can be extended to October 3, 2018. 

 The final rule contains many complexities and nuances.  This blog post provides a high-level summary of the main provisions affecting credit unions.  NAFCU’s Regulatory Affairs team will issue a detailed summary of the final rule shortly, which will be available to NAFCU members on our website (member login required).  NAFCU issued a Regulatory Alert on the proposed rule last year, which is currently available on our website (14-EA-25).  The final rule issued by the DOD was published in the federal register on Wednesday and can be found at 80 FR 43559.

Scope of the Final Rule

The final rule expands MLA protections to a broader range of closed-end and open-end credit.  Under the final rule, the phrase “consumer credit” is expanded to include credit extended to a “covered borrower” for personal, family, or household purposes, and is subject to a finance charge or payable by a written agreement in more than four installments.  For instance, payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards are covered under the new rule.  Certain types of loans, however, are specifically excluded from the definition of “consumer credit.”  For example, residential mortgages, motor vehicle loans secured by the vehicle being purchased, and any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased are specifically excluded.

The phrase “covered borrower” includes any member of the armed forces, or their dependents (as defined in 10 U.S.C. § 1072(2)), who is on active duty, or active guard and reserve duty.  The final rule allows credit unions to use the existing method for conducting a “covered-borrower check,” which involves the use of a “covered borrower” identification statement, as a safe harbor for compliance until October 3, 2016.   After October 3, 2016, credit unions can determine if a borrower is a “covered borrower” by using one of the safe harbor methods listed in the final rule.  The safe harbor methods include 1) checking the member’s duty status on the DOD database (available at https://www.dmdc.osd.mil/mla/welcome.xhtml), or 2) using a consumer report obtained from a nationwide consumer reporting agency (at this time, it is not clear how a nationwide consumer reporting agency will identify covered borrowers or their dependents).

Military Annual Percentage Rate and Payday Alternative Loans

The MLA, under the existing and final rules, prohibits a credit union from imposing a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower.  Under the final rule, MAPR covers all interest and fees associated with a loan, including most ancillary “add-on” products and application fees, unless excluded from the rule. 

One notable exclusion is an application fee charged by a federal credit union when making a qualifying short-term, small amount closed-end loan (e.g., Payday Alternative Loans or PALs).  This exemption, which was a NAFCU-sought modification to the proposed rule, specifically excludes from the MAPR calculation an application fee charged to a covered borrower when making a short-term, small amount loan, also known as a PAL loan. The application fee, however, may only be excluded once in a 12-month period. An application fee charged to a covered borrower who applies for a second short-term, small amount loan within the 12-month period of the first loan may not be excluded from the MAPR calculation. See 80 FR 43570.  A second noteworthy exclusion is for a credit card fee that is both “bona fide” and “reasonable” for that type of fee. See 80 FR 43573.  The final rule sets out specific standards for determining what type of fees are “bona fide” and “reasonable” for that type of fee.

NCUA’s December Report Addresses Concerns about Liability Under the Ability-to-Repay-Rule; Impact of DoD Proposed Rule Webcast; Programming Note

Written by Victoria Daka, Regulatory Compliance Specialist

Compliments of the season! "It’s the most wonderful time of the year.”

On Friday, Brandy blogged about the Region III Report article from the latest NCUA Report. Today, I’d like to take a look at another article from the NCUA Report, which focuses on the Ability-to-Repay Rule. This article seeks to address the concerns about liability under the CFPB’s Ability-to-Repay Rule by indicating the reason for the “qualified mortgage” definition; extending leeway to credit unions to continue using their existing successful traditional relationship-lending approach; and, summarizing the three main categories of “qualified mortgages.”

As per the article, “Congress directed [the CFPB] to define a category of loans where lenders would have certainty that their loans comply with the rule, and where borrowers would have the greatest protections. So, [the CFPB] developed criteria for what are called “qualified mortgages.” In addition, this article informs credit unions that they may continue to utilize their successful traditional relationship-lending approach, regardless of whether the mortgagees are “qualified,” as there many loans that are not qualified mortgages, yet are fundamentally sound.  

 Furthermore, this article summarizes the three types of qualified mortgages: (1) the general definition; (2) the “GSE eligible” provision; and (3) the small-creditor provision as follows:

“General Definition. Any loan for which the consumer’s income and debt have been considered and verified with a debt-to-income ratio of 43 percent or less is a qualified mortgage.

GSE or Agency-eligible” Category of Qualified Mortgages. If a mortgage is eligible to be purchased, guaranteed or insured by one of several government-sponsored enterprises or certain government agencies—Fannie Mae, Freddie Mac, the U.S. Department of Agriculture and the Rural Housing Service—it is considered a qualified mortgage…

Small-Creditor Category of Qualified Mortgages. If your credit union has less than $2 billion in assets (adjusted annually for inflation) and your credit union and affiliates made 500 or fewer first-lien, closed-end mortgages in the prior year, then all mortgages you keep in portfolio are considered qualified mortgages.”

 The article is available in its entirety here.

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Webcast: How All Credit Unions Will Be Impacted by the DoD Proposed Rule

If you offer unsecured credit of any kind, then this webcast is a must-attend event—the proposed rule doesn’t just affect military-focused credit unions. The Department of Defense’s proposed rule would amend the Military Lending Act (MLA) to make the definition of “consumer credit” cover more credit types. Learn what you can do to prepare and protect your credit union with this strategic webcast.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Thursday and Friday for the long holiday weekend. We will be back to blogging on Monday. Happy Holidays!

Comment Letter Talking Points for DoD’s Military Lending Act Proposal; Recent Policy Changes to Military Allotment Process

Written by Quincy Enoch, Military Liaison

Hello and Happy Holidays,

The Holidays are fast approaching which means the comment period deadline for the Department of Defense (DoD) lending rule is approaching fast as well. As Mike and I noted in our November 21^st post, this rule is going to impact all credit unions by creating additional compliance burdens for all credit unions.

Understanding the impact the DoD proposed rule will have on the credit union industry, many of our members have expressed interest in sending comments to DoD. With this in mind, NAFCU has prepared a helpful guide to look to when preparing your comment letters. If you have any questions, please don’t hesitate to contact me at [email protected].

DoD rule talking points

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Additionally, I would like to mention a recent change to the military allotment process. According to DoD, as a result of abuses of the allotment system by predatory banks and retailers, Secretary Hagel has prohibited the use of allotments to pay for particular items (for only active duty troops). These items include:

  - Vehicles (e.g., automobiles, motorcycles, boats);

  - Appliances or household goods (e.g., washer, dryer, furniture);

  - Electronics (e.g., laptop, tablets, cell phone, television); or,

  - Other consumer items considered to be tangible and movable.

The policy change is with respect to new allotments and will not affect any current allotments. The prohibition will only apply to allotments started on or after the effective date, which is January 1, 2015. The policy change will not affect allotments to savings account, checking accounts, investments, mortgages or rent.

These policy changes were made under Secretary Hagel’s authority to make changes to the Financial Management Regulation (FMR) and did not require the typical rulemaking procedures. To enforce the prohibition, DoD will require servicemembers to certify under penalty of the Uniform Code of Military Justice (UCMJ) that the allotment is not being set up for the purpose of the purchase, lease or rental of personal property or payment towards personal property.

Some helpful links:

DoD Announcement

Fact Sheet

Why the DoD Rule Affects All Credit Unions; Mike Coleman Says Goodbye to NAFCU

By Michael Coleman, Director of Regulatory Affairs, and Quincy Enoch, Military Liaison

In talking to credit unions about the impact of a recently proposed rule from the Department of Defense (DoD) regarding the Military Lending Act (MLA), many credit unions have noted that they have very few servicemembers in their membership or they don’t have any products that are over the 36% lending cap. Unfortunately, neither of those facts have a major impact on the compliance burden caused by the proposed MLA rule.

The real question credit unions should be asking is, “Do we offer credit cards, signature loans, traditional lines of credit, overdraft lines of credit or essentially any unsecured credit of any kind?” If so, then the MLA rule most definitely impacts your credit union.

The rule requires not only that covered products (which the rule defines as “consumer credit”) remain under a 36% “military annual percentage rate” but also that servicemembers receive special disclosures when consumer credit is extended to them. Under the proposed rule consumer credit is defined as all credit extended to servicemembers and dependents except mortgages, loans secured by personal property or loans for vehicle purchase. The definition includes essentially all unsecured lending. This is a significant expansion of the definition of consumer credit, which currently has a targeted focus on payday loans, vehicle title loans, and tax refund anticipation loans.

The true compliance burden stems from the fact that the rule places the responsibility of identifying servicemembers on the lender. That means  anytime a member comes in to obtain consumer credit it is the responsibility of the credit union to have a method in place to determine if that member is a servicemember or not. The rule allows flexibility regarding methods to determine the status of an applicant, but the lender is only granted a safe harbor if the lender checks the Defense Manpower Data Center (DMDC) database. This means that credit unions will need to integrate checking the DMDC into their systems before issuing any consumer credit to ensure compliance and obtain the safe harbor. Another significant problem with using the DMDC for a safe harbor is that the DMDC has not functioned properly recently, and the proposed rule would exponentially increase the number of searches the DMDC would need to handle. So the question then is, what do you do to obtain the safe harbor if the DMDC is down? Right now, it’s not clear.

Unfortunately, this  only gets you  half way to complying with the rule because there is an actual knowledge provision as well. The provision states that if the lender has actual knowledge of the status of the servicemember or dependent, the safe harbor will no longer be in effect. This mean that credit unions will also need to setup an internal database or procedures to check what the credit union actually knows as well, because if a servicemember presents you with a military ID when opening a joint account for himself and his spouse, the credit union then has actual knowledge that both the servicemember and spouse are covered borrowers for the purpose of the MLA rule.

The bottom line is that even if you do not have servicemembers in your credit union’s field of membership, this rule will have a significant impact on your credit union. It might affect the types of credit products that you are able to offer members of the military, and it definitely will increase compliance costs and operational burdens. Credit unions have a strong history of providing excellent service to servicemembers and safe credit products that meet their needs, which makes getting this rule right essential. NAFCU has issued a regulatory alert, and will submit comments to the DoD. We sent a letter to the NCUA on the proposal to express some initial credit union specific concerns, and called on the DoD to extend the comment period for the proposed rule. We’ve also joined other industry efforts related to the DoD proposal. Check out the Chairman’s Corner article in the most recent NCUA Report where Chairman Matz noted that NCUA will provide comments formal to the DoD on the rule.

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Thank you Credit Union-Land! This is just Mike talking now. Today is my last day with NAFCU, and I can’t say it loud or often enough, I am incredibly thankful to NAFCU for all the opportunities over the past several years, and for the best group of colleagues around. From my days in Compliance with Steve, JiJi, Bernadette, and Shari, to my current role as Director of Regulatory Affairs with Alicia, Angela, Megan, and PJ, and my time with all of NAFCU's government affairs team, I couldn’t have asked for a better group of people to work with to help NAFCU members and the credit union industry. And working for and learning from Dan, Fred, Carrie, and Anthony has been an incredible experience.

And of course, many thanks to the best members around. It’s impossible for me to describe how many devoted credit union people I have met along the way. I’ve talked to many of you directly, whether in person at conferences, or over the phone, via email, you name it. And the most common theme I have seen is that credit union people care. They care about their credit unions and they care about the credit union movement. It’s been an honor working with you, and I promise I won’t be a stranger! Thanks again for everything.

DOD Proposes to Expand Military Lending Act Rate Cap to More Consumer Credit Products

Written by Shari R. Pogach, Regulatory Paralegal

Last Friday, the Department of Defense (DOD) announced a proposed regulation that would expand the Military Lending Act’s (MLA’s) 36 percent rate cap, among other protections, to additional consumer credit products.  DOD’s proposed changes would apply the MLA protections to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit and credit cards (with some conditional exclusions).  

Under current implementing rules, MLA protections extend to closed-end payday loans for no more than $2,000 and with a term of 91 days or fewer, closed-end auto title loans with a term of 181 days or fewer and closed-end tax refund anticipation loans. The proposed changes would amend the definition of “consumer credit” to more closely match the definition under the Truth in Lending Act, covering more credit products.  Not all credit products would be affected by the proposed regulation - residential mortgages and purchase-money loans (to buy items like cars) are excluded from the MLA’s definition of “consumer credit.”

Elements of the proposal include:

• Amendments to extend the protections of the MLA implementing regulations to a broader range of credit products. The proposal would define “consumer credit” to be consistent with closed- and open-end credit products that already are regulated under the Truth in Lending Act. The intent is to move away from the product-by-product approach and towards a comprehensive, no-gaps approach.
• Alignment of the MLA with TILA to provide service members with more lasting protections.
• Loan disclosures intended to simplify a lender’s disclosure obligations to covered borrowers under the MLA and would provide for a non-numerical descriptive statement of Military APR that would be consistent across loans offered to service members.
• Allow lenders to assess whether borrowers are covered by the MLA by checking their status in an existing, publicly-available online DoD database. Lenders who used the database would receive a safe harbor from liability under the MLA.

NAFCU will be studying the proposed rule carefully for any unintended consequences from the proposal that would prevent credit unions, particularly those operating on military installations, from providing those safe credit products that servicemembers have come to depend on from their credit unions.  Comments on the proposed rule are due November 28, 2014.  A Regulatory Alert with an analysis of the proposal will soon be available for NAFCU members here (NAFCU member login needed).