Pub. 8 2017 Issue 4

23 West Virginia Banker Military Lending: Landmine or Goldmine By Kimberly Graves, Compliance Alliance S oldiers from the Civil War under Grant to currently deployed troops in Afghanistan have rested under the umbrella of federal legislation protecting their financial welfare while serving, though I can’t imagine that is any semblance of consideration for the sacrifices they make. In 1948 the Supreme Court added texture to the legislative predecessor of the Service- members Civil Relief Act (SCRA): “The Act should be read with an eye friendly to those who dropped their affairs to answer their country’s call.” LeMaistre v. Leffers, 333 U.S. 1, 6 (1948). Seven dec- ades, incalculable wars, and scores of unrefined lawmakers later, the umbrella is once again in the spotlight. In October of this year the Consumer Financial Protection Bureau (CFPB) pub- lished a nation-wide snapshot focused exclusively on servicemember complaints. Statistics in the report reflect a consistently upward trend in servicemember com- plaints filed with the CFPB, with two cate- gories of complaints pulling in the largest number: debt collection and mortgages. The previous month the Federal Trade Commission (FTC) launched a dedicat- ed website for its newly-created Military Task Force, which followed two summits earlier this year hosted by the commission and dedicated entirely to discussing and addressing servicemember financial chal- lenges. A current senior official at the Of- fice of the Comptroller of Currency (OCC) emphasized in a speech to military bankers last August that banks should expect to be held accountable for violations. When the regulations are violated, both banks and servicemembers suffer the consequences; when the regulations are followed, landmines become goldmines for both the bank and the servicemember. To effect that conversion, banks must ac- complish three objectives: (1) understand the various regulations; (2) evaluate bank compliance; and (3) implement missing compliance policies and procedures. Regulatory Perimeter The primary components of military lending regulation are the SCRA; Military Lending Act (MLA); Dodd-Frank prohibi- tions on unfair, deceptive, and abusive acts and practices (UDAAP); and state laws. Agencies including the CFPB and DOJ have filed suits against financial institutions for violations of these rules and secured consent agreements or court verdicts penalizing the institutions with civil fines up to $30 million. In 2016 Navy Federal Credit Union paid $23 million in restitution to consumers and a $5.5 million civil penalty for UDAAP viola- tions consisting of training deficiencies and collection attempts threatening to contact servicemember commanding officers. Of note in the case, the CFPB found that these collection attempts were deceptive despite the servicemember having signed an account agreement expressly provid- ing permission to contact a commanding officer because the language was buried in fine print, non-negotiable, and not bargained for. The previous year, Santand- er and Bank of America felt the sting of multi-million dollar civil money penalties resulting from violations of the SCRA. The DOJ website boasts of awards in cases against financial institutions as recent as September ranging from just over $1,000 to just under $1 million. The cases include violations of the SCRA by lenders who repossessed servicemember vehicles. Recent private actions against banks by servicemembers include liability for foreclosure, repossession, and interest rate violations. SCRA Unlike other regulations that target specific areas of a bank, the SCRA is broad with provisions penetrating multiple depart- ments and product lines. The Act primarily covers active duty military and their dependents; in limited circumstances business agreements are covered. Viola- tions are subject to enforcement actions, civil penalties, and private suits. The SCRA piles on with criminal penalties for several violations, making the stakes even higher for bankers. The crown jewel in the Act for new servicemembers is the interest rate cap of 6% on all loans (including mortgages) consummated before entering military service. Servicemembers must expressly invoke this right within 180 days of release from the military. You read that correctly – the regulation permits retroactive interest reduction. Calculation of the interest rate is unique and can be tricky. The SCRA, among other things, also provides protections against default judgment, rights to terminate leases, judicial stays or extensions, revised statutes of limitation, amended contrac- tual liability, and prohibition on creditor self-help actions like foreclosure and repossession without court approval. MLA Three areas of the MLA for banks to note: (1) Certain oral and written (yes – both) disclosures are to be made before extending credit; (2) Prohibitions are placed on mandatory arbitration claus- es, prepayment penalties, and waivers of certain legal rights, including those under the SCRA; and (3) Rates are capped at 36% on all covered loans, with a distinct rate calculation inclu- sive of “add on” products like credit insurance and ancillary fees. Cover- age is limited to servicemembers on active duty and dependents. Originally MLA applicability was limited, but the 2015 amendments expanded coverage to most Truth in Lending (TILA) loans. Thus, most consumer credit sub- ject to finance charges or with install- ments is now included. Credit cards and student loans are the big additions, while mortgages, most auto loans, and over- draft protection remain excluded. The final piece of the amendments became effective in October. Creditors are required to determine if a borrower is covered by the Act, but safe harbor is available if verification is ob- tained through the MLA online database or consumer credit report containing military status. Violations can result in en- forcement actions, civil penalties, private suits, and criminal liability. UDAAP Definitions for unfair, deceptive, and abusive acts are found in the regula- tion itself and the CFPB has provided additional guidance and examples in their manual online. Actual instances of actions the Bureau claimed were violations include threatening to call a commanding officer, misrepresenting the creditor’s intended actions with respect to legal remedies, hidden fees, and deceptive advertising. Winter 2017