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Reorganization of the United States Code Affects SCRA Classification
Effective December 1, the Servicemembers Civil Relief Act (SCRA) was recodified at 50 U.S.C. §§ 3901 – 4043 from its former location at 50 U.S.C. app. §§ 501 – 597b. Recent structural changes to the U.S. Code eliminated the Appendix to Title 50, with several provisions transferring into the body of Title 50. Historically, the 1940 edition of the U.S. Code established the Appendix to Title 50 for emergency-related or temporary executive branch documents and law. However, because of the enduring nature of several laws contained in the Appendix, the Office of the Law Revision Counsel concluded that it would “improve the organizational structure” of the U.S. Code to move these sections into Title 50. Importantly, the law was not amended, so there are no substantive changes to the SCRA from this recodification. To assist clients in tracking these changes, BuckleySandler attorneys have prepared this chart mapping the old sections of the SCRA with their new locations in Title 50.
Spotlight on the Military Lending Act, Part 3: Falling in Line with MLA Compliance
With recent changes in the regulations implementing the Military Lending Act (“MLA”), creditors are now reevaluating their compliance plans to ensure they are prepared for the new regulations. Although there is no formal guidance on what federal regulators will look for in reviewing MLA compliance, the commentary that accompanied both the proposed and final rule gives some insight as to where regulators will focus examination and enforcement resources. Below, we discuss some of these likely areas of focus, and offer suggestions for how institutions can prepare for regulatory scrutiny.Determining military service and MLA safe harbor provisions
The MLA only applies to a “covered borrower,” which is either a servicemember (as defined under the MLA) or a servicemember’s dependent. The MLA provides two safe harbors to determine if a consumer is a covered borrower: (1) a set of results from the DoD’s MLA database, or (2) a military status indicator in a consumer report.
Although both of these approaches are optional—and a creditor may use a different method to determine if an individual is eligible for MLA protection—they provide several benefits. They are both determinative, so even if the borrower is in fact a servicemember a safe harbor check that shows otherwise will govern. Both checks can also be done without
inconveniencing the consumer or requiring them to attest to their military status.
However, these safe harbor approaches are only effective if the results are actually retained by the creditor. Since military status checks must be performed at origination, we recommend that the results of these checks be retained with the origination documents. Not only does the outcome of the military status check determine the substantive terms of the actual credit obligation, but by keeping all of these documents together, a creditor can ensure that they have all of the governing origination documents are in a single, secure location.
Ancillary products and calculation of the Military APR (“MAPR”)
In crafting the new MLA rules, the Department of Defense expanded the list of items to include in calculating the MAPR. One of the most significant changes is the addition of fees paid “for a credit-related ancillary product sold in connection with the credit transaction.” Although the MAPR limit is 36%, ancillary product fees can add up and—especially for accounts that carry a low balance—can quickly exceed the MAPR limit. This broad definition of the interest rate under the MLA also coincides with the expansive approach that federal regulators have taken regarding enforcement of the interest rate limitations under another military protection statute, the Servicemembers Civil Relief Act. The CFPB has made no secret of the fact that it reviews add-on products closely, and we expect the Bureau to use the MLA as another method of targeting ancillary products.
Prohibition against mandatory arbitration
Although most of the focus has been on the revised MAPR requirements in the new rules, the MLA has prohibited mandatory arbitration for eligible accounts since 2007. While this provision remains the same under the new MLA rules, what has changed since 2007 is a renewed focus on mandatory arbitration by federal regulators. Since the CFPB’s creation in 2011, mandatory arbitration—and its impact on consumers—has been a key area of focus for the Bureau. With the CFPB’s Office of Servicemember Affairs closely watching any practices that may harm military borrowers and the Bureau’s overall focus on arbitration, we expect the arbitration provisions of the MLA to become a keen area for regulatory review.
MLA disclosure requirements compliance
Finally, the MLA requires special disclosure requirements for eligible loans. While most creditors are familiar with the Truth in Lending Act (“TILA”) and Regulation Z disclosure requirements, the MLA also requires that the servicemember receive “a statement of the MAPR applicable to the extension of credit.” This disclosure must be provided before or at the same time that the servicemember enters into the transaction.
To ensure compliance with the MLA, we recommend a streamlined, product-specific set of disclosures that an MLA-eligible consumer can receive at origination. To protect against borrower claims of insufficient disclosures and post hoc regulatory scrutiny, we recommend that creditors retain copies of the MLA disclosures along with the original check of the MLA website and credit agreement.
SCRA Compliance, Cybersecurity, and Responsible Innovation Remain Top Priorities at OCC
On August 31, Grovetta Gardineer, the OCC’s Deputy Comptroller for Compliance Operations and Policy, delivered remarks at the Association of Military Bankers of America annual workshop in Leesburg, VA. Throughout her presentation, Gardineer highlighted issues affecting financial institutions focused primarily on lending to servicemembers. Gardineer discussed the OCC’s ongoing efforts to identify and correct deficiencies within bank and thrift compliance practices and noted improved Servicemembers Civil Relief Act (“SCRA”) compliance by regulated institutions. Specifically, Gardineer observed that in 2014, the OCC cited sixty-five SCRA violations among large, midsized, and community institutions. For the first quarter of 2015, however, Gardineer reported that OCC examiners cited only seven SCRA violations. Gardineer also referenced recent amendments to the Military Lending Act (“MLA”) which expanded consumer protections to both open-end and closed-end consumer credit for servicemembers; she emphasized that banks should be proactive in updating their internal policies and procedures to reflect the MLA’s changes. Reiterating the OCC’s commitment to cybersecurity, Gardineer advised that OCC examiners intend to use the cybersecurity assessment tool “to supplement exam work to gain a more complete understanding of an institution’s inherent risk, risk management practices, and controls related to cybersecurity.” Finally, Gardineer discussed innovation within the industry, such as the emergence of various mobile payments transfer systems and peer-to-peer lending. She stressed that the OCC intends to facilitate a responsible regulatory environment that will encourage innovative financial products and services while also implementing regulations to ensure adequate consumer protections.
CFPB Report Details Ongoing Challenges Between Servicemembers and Student Loan Servicers
On July 7, the CFPB released a report detailing the continued challenges military servicemembers experience related to the servicing of their student loans, particularly when trying to invoke certain rights granted under the Servicemembers Civil Relief Act (SCRA). This report follows the CFPB’s May announcement seeking public comment on student loan servicing practices related to servicemembers. Based on over 1,300 complaints received, the report details how both private and federal student loan servicers continue to make mistakes handling servicemembers’ student loan repayments, leading to wrongful denial of legal benefits and negative credit reporting for military families. Specifically, the report highlights servicemembers’ difficulties in (i) obtaining the SCRA’s 6-percent interest rate cap; (ii) receiving adequate information or having requests properly processed, especially regarding deferment plans (leading to unwarranted delinquencies, defaults, and debt collections); and (iii) discharging the debts of severely injured veterans or the families of deceased servicemembers.
National Bank to Pay $30 Million Civil Penalty to OCC for Alleged SCRA Violations
On May 29, the OCC entered into a consent order with a national bank to resolve allegations that it (i) violated the SCRA; (ii) engaged in unsafe and unsound practices in its efforts to comply with the SCRA; and (iii) engaged in unsafe and unsound practices in regards to its sworn document and collections litigation practices. The OCC claimed that the bank did not comply with the SCRA by failing to: (i) maintain effective policies and procedures; (ii) devote adequate financial, staffing and managerial resources to guarantee the SCRA compliance process was properly administered; and (iii) provide sufficient internal controls, compliance risk management, internal audit, third party management, and training related to its SCRA compliance process. In relation to the sworn document and collections litigation process, the OCC asserted that the bank’s deficiencies in its enterprise compliance risk management function resulted in unsafe and unsound practices, including failure to ensure that affidavits filed in court followed proper notary procedures. Under the terms of the consent order for a civil money penalty, the OCC will collect $30,000,000 from the bank.
Department of Education Releases Reports on SCRA Reviews of Major Student Loan Servicers
On May 26, the Department of Education announced the release of reports on its reviews of four major federal student loan servicers, which were conducted to ensure that the servicers adhered to federal law concerning loan interest rates for active-duty servicemembers. Specifically, the Department aspired to determine whether eligible borrowers of eligible Family Federal Education Loans (FFEL) and Direct Loans received the benefit of the 6 percent interest rate cap provided by the SCRA in accordance with applicable statutes and the Department’s regulations and guidance. The reviews considered servicemembers’ SCRA eligibility between 2009 and 2014, and showed that “in less than 1 percent of cases, borrowers were incorrectly denied the 6 percent interest rate cap required by the laws.” In addition to these reviews, the Department will be “expanding its review of compliance with the SCRA and HEA to the Department’s seven non-profit servicers as well as commercial [FFEL] servicers,” with completion expected later this year. The Department’s reviews follow a May 2014 DOJ settlement with one of the four student loan servicers.
California-Based Storage Company Agrees to Settle SCRA Claims
On May 15, a San Diego-based storage company entered into a consent order with the DOJ to settle claims that the company’s practice of auctioning off active duty servicemembers’ stored belongings violated the Servicemembers Civil Relief Act (SCRA). As part of the settlement, the storage company will: (i) pay $170,000 in damages to those servicemembers whose stored belongings it sold without obtaining a court order; (ii) implement new SCRA policies and procedures, which are to be approved by the government; and (iii) ensure that those employees who are involved with the enforcement of storage liens receive government approved SCRA training annually.
Indiana Enacts Servicemembers Civil Relief Act
On May 4, Indiana Governor Michael Pence signed H.B. 1456 into law, amending the state’s civil relief act to include protections for servicemembers under the federal Servicemembers Civil Relief Act (SCRA). The legislation also requires the Indiana National Guard provide both active and reserve members a list that details the rights a servicemember or a dependent of a servicemember are entitled to under the state and federal SCRA. The law will take effect on July 1, 2015.
DOJ Submits 2014 Equal Credit Opportunity Act Annual Report to Congress
On April 13, the DOJ released its 2014 Annual Equal Credit Opportunity Act (ECOA) Report highlighting its activities to address credit discrimination. The twenty-page report highlights discrimination lawsuits and settlements in the automobile lending and credit card industry, as well as a consent order resulting from alleged discrimination on the basis of disability and the receipt of public assistance. It also includes information on the DOJ’s work under other federal fair lending laws including the Fair Housing Act (FHA) and the Servicemember Civil Relief Act (SCRA). According to Vanita Gupta, Acting Assistant AG for the Civil Rights Division, in the five years since the Fair Lending Unit was established, the Civil Rights Division has filed or resolved 37 lending matters under the ECOA, FHA, and SCRA. Total settlements in these matters, including enforcement actions from 2014, have resulted in over $1.2 billion in monetary relief for affected borrowers and communities.
DOJ Reaches Agreement With Leading Mortgage Servicers Over Servicemember Foreclosures
On February 9, the DOJ announced a $123 million settlement with five national mortgage servicers for allegedly violating sections of the SCRA. Specifically, the DOJ alleges that the mortgage servicers subjected over 900 service members to unlawful non-judicial foreclosures between January 1, 2006 and April 4, 2012. Under the SCRA portion of the 2012 National Mortgage Settlement, the five mortgage servicers will reimburse millions of dollars to service members who should have been protected from foreclosure, as per Section 533 of the SCRA, which “prohibits non-judicial foreclosures against service members who are in military service or within the applicable post-service period, as long as they originated their mortgages before their period of military service began.” The mortgage servicers are cooperating with the Justice Department to compensate service members affected by the alleged non-judicial foreclosures.
