Untangling SCRA and MLA

Drive near a U.S. military base and what do you see--used car dealers, payday lenders and others that are ready to provide our military servicemembers with consumer credit financing. Some lenders are legit and others may take advantage of the servicemember’s naivety regarding finances or their rush to obtain a credit card before they are deployed overseas or the lender may obtain the servicemember’s signature without fully and clearly explaining what the servicemember is signing (and committing to).

Over the past several years protecting servicemembers from predatory lending practices and increasing their financial protection has been the focus of the legislators on Capitol Hill, the Department of Defense (DoD), the Consumer Financial Protection Bureau (CFPB) and banking regulators like the Office of the Comptroller of the Currency (OCC). While progress has been made through the creation of SCRA compliance specialists at banks, increased bank self- monitoring and bank employee training, the OCC believes that compliance practices are still inadequate. Speaking before the Association of Military Bankers of America in late 2015, Grovetta Gardineer, Deputy Comptroller for Compliance Operations and Policy, stated that “nonbanks and commercial banks alike continue to fail to provide all the safeguards required by law or worse, actively take advantage of the vulnerabilities unique to our servicemembers and their families. In reviewing compliance with the Servicemembers Civil Relief Act of 2003 (the SCRA), the OCC has seen deficiencies in the practices and procedures at some banks related to their SCRA-compliance programs.” The deputy comptroller also said that “compliance with the 2003 law remains a matter of great concern to the OCC.”

The OCC includes SCRA compliance in every examination cycle at every bank they oversee. So as a banker you need to be prepared and understand your responsibilities with the SCRA and the recently amended Military Lending Act (MLA) to ensure that your bank’s SCRA/MLA compliance program is current and sufficient. This article provides you with best practices you can implement today.

First let’s start with an explanation of SCRA and then we’ll take a closer look at MLA.
 
SCRA—Explanation and Compliance Expectations
The Servicemembers Civil Relief Act of 2003 (SCRA) was signed into law in December 2003 and replaces the Soldiers’ and Sailors’ Civil Relief Act of 1940. There has been a demonstrated emphasis on assisting servicemembers through amendments to SCRA by the Veterans Benefits Improvement Act and the Housing and Economic Recovery Act of 2008 (HERA). As well as amending HERA with the Helping Heroes Keep Their Homes Act of 2010 and through the Veterans Disability Protection Act of 2010 provisions were added for the U.S. attorney general to bring civil actions, including monetary damages, against violators of the SCRA.

The SCRA applies to members of the United States Army, Navy, Air Force, Marine Corps and Coast Guard, including members of the National Guard, as they enter military service (called to active duty). Also covered by SCRA are commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration engaged in active service. Some of the SCRA benefits extend to spouses, dependents and other persons subject to financial obligations of servicemembers.

The purpose of SCRA is:

  1. to provide for, strengthen and expedite the national defense through protection extended by this Act to servicemembers of the United States to enable such persons to devote their entire energy to the defense needs of the Nation; and
  2. to provide for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service.1

SCRA covers the following:

  • Interest rates are capped at six percent on debt incurred before a servicemember enters active duty
  • Credit cards
  • Life insurance is protected against cancellation or non- reinstatement of health insurance policies
  • Mortgages and the prohibition of eviction from mortgaged and rental property
  • Motor vehicle purchases and leases
  • Other provisions related to taxes and civil claims

Beyond general compliance expectations such as adequate policies, procedures and training bank regulators may review the following2 during examinations:

  • How does the bank determine SCRA eligibility and how is the servicemember’s military service validated?
  • How does the bank handle and process requests for interest rate reductions under the SCRA on debt obligations incurred by a servicemember before they entered military service?
  • How is the reduced interest rate calculated? And is the reduced interest rate effective as of the date the servicemember was called to active duty?
  • Has the bank ensured that sufficient policies, procedures, processes and monitoring are in place to ensure that they do not take adverse action against a servicemember solely because the servicemember exercised rights under the SCRA?
  • Did the bank obtain a court order before rescinding or terminating contracts by a servicemember for the purchase, lease, or bailment of real or personal property (including a motor vehicle) for any breach of terms occurring before or during military service, provided a deposit or installment had been paid prior to entry into military service?
  • Does the bank periodically conduct a SCRA compliance risk assessment, identify gaps/issues and take appropriate remediation action in a timely manner?

MLA—Explanation and Compliance Expectations
The Military Lending Act was passed by Congress in 2006; amendments to the act were finalized in July 2015 and the new MLA Rule was issued by the Department of Defense2. The “new rule addresses a range of credit products that previously escaped the scope of the regulation, compromising the financial readiness of our troops, “ said Deputy Secretary of Defense Bob Work.

MLA covers 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. Residential mortgages and purchase-money loans (to buy items like cars) are excluded from the MLA’s definition of “consumer credit.”

The MLA Rule3 specifically provides the following protection to the servicemember:

  • The creditor may not impose a Military Annual Percentage Rate (‘‘MAPR’’) greater than 36 percent in connection with an extension of consumer credit.
    • Modifies the MAPR to include fees for credit- related ancillary products sold in connection with the credit transaction, finance charges associated with consumer credit, and certain application and participation fees.
    • For credit cards, the MAPR excludes certain fees if bona fide and reasonable.
  • The creditor is prohibited from requiring the servicemember to submit to mandatory arbitration and onerous legal notice requirements; waive their rights under SCRA; and provide a payroll allotment as a condition of obtaining credit.

For creditors the MLA Rule provides a safe harbor for determining whether a consumer is covered by the final rule’s protections; modifies the existing prohibition on rolling over, renewing or refinancing consumer credit; and subjects creditors to civil liability and administrative enforcement for MLA violations.

The rule went into effect on October 1, 2015 and various compliance dates. Financial institutions and other creditors must comply with the rule for new covered transactions beginning October 3, 2016. For credit extended in a new credit card account under an open-end consumer credit plan, compliance is required beginning October 3, 2017.

How DHG Can Help
DHG’s team of regulatory compliance professionals stand ready to assist you in understanding your compliance responsibilities for SCRA and MLA; our pros can provide the following services:

  • Compliance Program Governance
  • Compliance Program Assessment and Improvement Recommendations
    • Risk Assessment
    • Program Gap Identification and Mitigation
    • Monitoring and Testing
    • Policies and Procedures
    • Training
    • Compliance Risk Reporting
  • Compliance Regulatory Examination Prep and Management

1. Source, 50 U.S.C. Servicemembers Civil Relief Act of 2003; www.gpo.gov
2. The list does not represent all subject areas that may be included in the examination performed by the bank regulator.
3. DoD worked with the following federal government agencies to develop the MLA Rule: CFPB, OCC, Federal Trade Commission, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, and the U.S. Treasury Department.
4. The complete Rule should be read in its entirety. Federal Register:
https://www.gpo.gov/fdsys/pkg/FR-2015-07-22/pdf/2015-17480.pdf