Federal Docket Management System Office
1160 Defense Pentagon
Washington , DC 20301-1160
RE: Limitations on Terms of Consumer Credit Extended to Service Members and Dependents
FR Doc. 06-9518
Dear Sir or Madam,
The Michigan Credit Union League (MCUL) is pleased to be able to provide its comments in response to the Department of Defense Notice and Request for Comments concerning the Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, §670 of the John Warner National Defense Authorization Act for Fiscal Year 2007 (The Act), published on page 70512 in the Federal Register, Vol. 71, No. 233.
The League is the primary state trade association for state and federal credit unions located in Michigan and its membership is comprised of nearly 350 credit unions with over 4 million members. MCUL is also affiliated with the Credit Union National Association (CUNA), a federal trade group representing state and federal credit unions across the nation.
The MCUL appreciates the background that led up to the passage of this legislation and positively supports efforts to banish any type of predatory lending. As a credit union trade association, we are acutely aware of the differences between ourselves and our for-profit cousins. While we do not perceive ourselves as charitable institutions, we strive to assist our members in offering credit where few other options exist, to further their education re financial matters, and to assist them in providing for a more secure financial future with steady and deliberate savings programs to build a degree of personal wealth. Thus predatory lending is contrary to the very purpose of credit unions and our collective mission. Thus we view this law with mixed emotions as it is a positive effort by the Congress in attempting to reduce predatory lending, but at the same time brings with it many problems for both ourselves as non-profit entities as well as banks and thrifts, not to mention the men and women of our armed service whom the law intends to protect.
In general, this law, even with tightly drafted regulations, imposes unnecessary requirements on legitimate creditors with the unfortunate result of decreasing borrowing options for covered service members. While the law was passed to target predatory lenders, it will have the unintended consequence of reducing credit available from mainstream depository institutions that are highly regulated, clearly legitimate, and already hold themselves to a high ethical standard.
Specifically, we offer the following comments:
New Requirements for Interest, Annual Percentage Rates and Disclosures
All of these elements of a loan transaction are interrelated. Under the combined provisions of the Act the result is a whole new ballgame even for mainstream depository institutions. There are new definitions, new requirements and new disclosures that differ from and in fact exceed what all depositories have become accustomed to since the passage of Truth in Lending and Regulation Z in the 1980’s. Despite the Act’s references to the TILA and Reg Z, this new law goes further, and will require new forms and disclosures applicable only to consumer loan transactions to covered service members and dependents. For regulated depositories, this will increase the cost of operations. In many cases, especially for smaller institutions, this will impose a heavy compliance burden that may be too great to sustain.
Covered Member Determinations
Our concerns in this area relate to the process for determining whether a potential borrower is a covered service member or dependent. Under the Act, the creditor will need to know the answer to that question. An internet transaction will present its own verification challenge. The additional compliance burden lies not only with creditors, but now also for the service member and dependent who will naturally perceive this as one more inconvenience. Perhaps this is a routine practice for service members and creditors located near military and naval installations, but in fact this procedure will be required wherever service members or their dependents live and conduct financial transactions. This problem is presently vastly aggravated by the number of National Guard and Reservist called to active duty. With creditors and borrowers already laboring under Bank Secrecy Act and related Customer Identification Program requirements, this represents one additional step and is not insignificant.
Definitions of “Creditor” and “Consumer Credit”
The Act calls for new regulations that establish the definitions of creditor and consumer credit “consistent with the provisions of this section.” While it is not clear from the Act’s definition of these two terms just how much latitude there is in further defining these terms under new regulations, we would urge the DOD in its regulations to restrict the scope to the entities that originally triggered the legislation, and exempt, or otherwise lessen, the Act’s impact on the already highly regulated mainstream depository institutions subject to federal TILA, Reg Z and other federal and state consumer protection and anti-predatory lending laws and regulations (state and national banks, thrifts and credit unions).
As for the definition of “consumer credit,” any proposed regulations should take into consideration the broad variety of personal loans that fall outside the Act’s definition. Home equity loans and education loans are two examples where new money is oftentimes used to pay off previous loans in a legitimate structured transaction. In an effort to stop the predatory lender, many excellent financial tools have been eliminated for the very sector of the marketplace that may need them to participate in legitimate loan programs.
It is appropriate that penalties be imposed for knowing, intentional and egregious violations of the Act. However, we would urge that opportunities be provided to cure de minimus violations without penalty that are not systemic in nature. In addition, we also urge some flexibility in the application of the regulations depending on the creditor’s skill level, understanding or intentions.
It is also unclear whether and how a creditor can go to prison. Is it the loan officer that made the loan, or the creditor’s president or CEO or chairman of the board? This may have the unintended effect of diminishing appeal for anyone to serve on a board of directors of a financial institution, whether it be a bank, a thrift, or a credit union where its directors are unpaid volunteers.
As already indicated, this Act will require many new changes…new terms, new calculations, new procedures, new disclosures. Any new regulations should therefore give creditors sufficient time to, among other things, change their policies, procedures, forms, software, vendor contracts etc, as well as adequate time for staff training needed to comply with the Act and its new regulations. Vendors that supply related services will also be impacted for example, loan software suppliers, whose products must be updated in response to new calculations, tested and then implemented.
We strongly urge that any regulations be given an effective date that offers creditors the maximum time allowable to understand and implement the changes required by the Act and its regulations. An effective date for any regulations, including Interim Regulations, earlier than October 1, 2007 would be next to impossible to meet. And even with the Act’s stated effective date of October 1, 2007, most financial professionals would say that despite best efforts, there will likely be a high degree of non-compliance. There are just too many elements, too many parties in interest, and too short a period for training to effect the needed changes in such a short period of time.
Again, we appreciate the opportunity to comment.
In conclusion, while this Act had the best intentions, it will have many unintended consequences. Smaller institutions will be hit the hardest. Many will try to do their best to comply, but most will struggle. Or in some cases, some will simply choose not to make loans to service members and their dependents.
Michael J. DeFors
Director Regulatory Affairs