ABA Banking Journal - February 2008 - (Page 58)

COMPLIANCE CLINIC its branches never make any loans that would be covered by the regulation. If a bank does not offer any covered consumer credit transactions, the compliance risk is low. However, even if the risk is low, because the bank does not offer such a product, there is always the potential for a creative lender to depart from the norm and tailor a loan to a borrower (and possibly a “covered borrower,” as defined further on) that could bring the bank under the regulation. requirements for the new Military Annual Percentage Rate (MAPR). lation says that the intent of the regulation is to cover credit products that are designed to expressly use tax refunds as collateral for the loan and not cover loans where borrowers merely note that a tax refund may be used to repay. The other key definition limiting coverage is “covered borrower.” That is, the regulation only applies if a creditor makes a covered loan to a covered borrower. A covered borrower is a regular or reserve member of the armed forces serving on active duty and the member’s spouse, children, or other dependent. To determine if a borrower is a covered borrower, a creditor can use the model Covered Borrower Identification Statement provided in the regulation, which puts the burden on potential borrowers to self-identify, allowing the creditor to rely on the borrower’s declaration of coverage or noncoverage. DOD, credit regulator? All types of creditors fall under the new DOD regulation, not just payday lenders and predatory lenders, even though the types of credit targeted by the legislation and regulation are not typically found at insured depository institutions supervised by the federal banking regulatory authorities. If a creditor is a “creditor” as defined by Regulation Z (Truth in Lending Act), the creditor is a creditor under the DOD regulation, too. In addition, if a person is an assignee of a covered type of consumer credit transaction, that person is also subject to the DOD regulation, even if the person did not make the original loan. Thus, a bank that buys instalment paper from third parties needs to be aware that the assignment could bring it under the coverage of the DOD regulation, depending on the type of credit involved. Banks have been very nervous over the past year or so, anticipating how the DOD would perform as credit regulator. While no new reg is enjoyable, there is at least some comfort in knowing from whence the ill wind blows, so to speak, in terms of rules from usual regulators. The DOD took a long time to publish the new regulation. It consulted with the federal financial regulators (FDIC, OCC, Treasury Department, Federal Reserve Board, OTS, NCUA, and FTC) to draft a regulation that provides some consistency with existing credit regulations like Regulation Z. There are references in the DOD regulation to definitions in Regulation Z and the DOD regulation incorporates familiar APR calculation methodology from Regulation Z into the 58 FEBRUARY 2008/ABA BANKING JOURNAL Coverage issues Banks naturally have spent much time studying the coverage of the regulation. If a bank is not making any of the types of loans included in the definition of “consumer credit transaction,” the DOD regulation does not apply to them. A consumer credit transaction is defined as closed-end credit to a covered borrower primarily for personal, family, or household purposes that meets the definition of a payday loan, tax refund anticipation loan, or a vehicle title loan. Each of these types of specialized loan products has specific criteria that apply. Payday loans covered by the reg are those that have a term of 91 days or fewer and amount financed of $2,000 or less. Vehicle title loans covered by the regu- “Congress gave DOD authority to broaden its coverage if necessary. Thus, if DOD discovers creditors using different methods of providing similar types of short-term, high-cost credit to service members and families that result in abuses, it can expand the regulations” lation are only loans with a term of 181 days or less, and that are secured by the title to a motor vehicle that are not used to purchase the vehicle. Tax refund anticipation loans covered are limited to loans in which the borrower expressly grants the creditor the right to receive all or part of the borrower’s income tax refund, or expressly agrees to repay the loan with the proceeds of the borrower’s refund. For banks that are concerned that such loans could include any loan that is made to a borrower who plans to repay the loan with a future tax refund, explanatory information issued with the final regu- Although the regulation is narrow in scope, an important caveat must be considered: Congress gave the DOD the authority to broaden its coverage if necessary. Thus, if the DOD discovers that creditors are using different methods of providing similar types of short-term, high-cost credit to service members and their families that result in abuses, it can expand the regulation. Credit limits and disclosure additions If a covered loan is made to a covered borrower, the regulation contains limitations on terms of the credit, including: • Maximum Military Annual Percen-

Table of Contents Feed for the Digital Edition of ABA Banking Journal - February 2008

ABA Banking Journal - February 2008 Contents On ABABJ.COM: Have You Visited Our Brand-New Website? Editor's Column "That's Edutainment" Snapshot: Tier 1 Ratios Stable so Far 100th Anniversary: Then and Now ABA Resources ABA Chairman's Position Don't Despair Pass the Aspirin Cover Story: Socially Responsible Banking Profitably - Incoming America's Community Bankers Council Chairwoman, Dorothy Bridges Demonstrates the Way A True "Rags-to-Banker" Story Retail Banking: On the Money Hunt Community Bank Management: The Ugly Truth About Board Relations Does Core Really Matter? Security 2.0: Not Just a New Kettle of Phish A Personal Case of Mal-Serendipity DOD Credit Regs Demand Attention Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - February 2008

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