Title: Military Credit Regs Demand Close Attention: Think the New Department of Defense Regulations Don't Apply to Your Bank? A Closer Look Might Surprise You
Abstract: A U.S. military service ,member finds himself or herself in a financial crisis. There s too much debt, or a family emergency arises. So the service member turns to short-term solutions, such as payday loans or titled vehicle loans, to get through the current situation. But what happens next is often the beginning of a recurring cycle of very costly debt that compounds on itself and becomes harder and harder to dig out of. The stress caused by the quagmire of debt has become a problem for many military families, and thus for the military itself. The military has implemented programs to help. These range from financial education to making predatory lenders off-limits to military personnel. They include military aid societies that provide financial assistance to affected individuals. Beyond those measures, part of the response to this problem is new legislation and regulation. The John Warner National Defense Authorization Act for fiscal 2007 was passed on Oct. 17, 2006, and implementing regulations were issued by the Department of Defense (DOD) in August 2007. The DOD Limitations on Terms of Consumer Credit Extended to Service Members and Dependents Regulation became effective on Oct. 1, 2007. The act and implementing regulations require additional disclosures for and place certain limitations on loans within the defined categories of payday loans; titled vehicle loans; and tax refund anticipation loans to service members and their dependents. Any that makes any of these to a regular or reserve member of the armed forces (Army, Navy, Air Force, Marines, or Coast Guard) on active duty, or their dependents, must provide additional loan disclosures and adhere to certain limitations on rate, prepayment penalties, and related factors. [ILLUSTRATION OMITTED] A bank should not choose to completely ignore the DOD regulation. Civil money penalties can be assessed by regulators. In addition, the law provides that a contract containing any prohibited term is voided. Risk assessment process Every bank should take the time to determine what, if any, risk it may have in connection with the new requirements. The first step in the risk assessment process is to identify any products and services that could be by the regulations. Some will be apparent on their face, but others won't be so obvious. They could include sub-categories and pricing variations of broader product categories. Many banks have initially assumed that they are not subject to the DOD regulation, but upon closer examination have found that indeed they are in some way. One bank, for example, discovered that a single branch out of its whole network, one located in a rural area, makes a handful of vehicle title loans each year, while the rest of its branches never make any loans that would be by the regulation. If a bank does not offer any 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. 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 is a creditor as defined by Regulation Z (Truth in Lending Act), the is a under the DOD regulation, too. In addition, if a person is an assignee of a type of consumer credit transaction, that person is also subject to the DOD regulation, even if the person did not make the original loan. …
Publication Year: 2008
Publication Date: 2008-02-01
Language: en
Type: article
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