CUNA Comment Letter
Department of Defense Regulations to Implement the Consumer Credit Provisions of the John Warner National Defense Authorization Act
February 5, 2007
Federal Docket Management System Office
1160 Defense Pentagon
a Washington, DC 20301-1160
RE: Department of Defense Regulations to Implement the Consumer Credit Provisions of the John Warner National Defense Authorization Act Docket No. DOD-OS-0216
Dear Sir or Madam:
The Credit Union National Association (CUNA) and the Defense Credit Union Council (DCUC) appreciate the opportunity to provide the Department of Defense (DoD) additional comments regarding the consumer credit provision of the John Warner 2007 National Defense Authorization Act (Act). As DoD prepares to draft the implementing regulation, we urge the Department to ensure the final rule does not impact mainstream financial institutions, nor create unintended limitations on our troops and their families to obtain favorable credit products and services.
This letter is a follow-up to our January 10, 2007 letter to Dr. Chu and responds to the Departments Notice in the December 5, 2006 Federal Register. CUNA represents approximately 90 percent of our nations 8,700 state and federal credit unions, which serve nearly 87 million members. DCUC represents 245 military affiliated credit unions, the vast majority of whom operate on military bases worldwide and are also members of CUNA and all of whom support the military and civilian personnel of the Department of Defense.
SUMMARY OF ADDITIONAL COMMENTS
- As outlined in our letter to Dr. Chu, we urge DoD to review its authority to define key terms such as creditor to avoid punitive, unnecessary regulatory burdens for credit unions and other institutions that do a very good job serving the military. These terms should also be defined so that credit unions are affected no less favorably than other traditional financial institutions.
- Optional products and services, such as GAP insurance, vehicle warranties, credit insurance, and identity theft protection, should not be included as part of the annual percentage rate (APR) calculation.
- Fees included in the APR calculation should only be those that are required at the time credit is originated and not include future fees that are dependent on the behavior or payment history of the borrower, or optional fees that are at the discretion of the borrower.
- Overdraft privilege or courtesy pay provide benefits to servicemembers who may inadvertently bounce checks, as they help them avoid high merchant fees and embarrassment, and prevents adverse credit ratings. If these fees are included in the APR calculation, these services could be jeopardized, as it would be impossible to calculate the APR.
- There should be flexibility regarding the timing and method in which oral disclosures are provided. The process must be simple and unencumbering. Creditors who are regulated by financial institution regulators should not be required to prove the disclosures were given, other than a notation in the credit file, and should not be required to prove that the servicemember understands these oral disclosures.
- Written and oral disclosures required under the Act should be subject to consumer testing.
- The rules should not prohibit payroll deductions as a means of repayment, especially if this is voluntarily agreed to by the creditor and borrower. Payroll deduction helps the borrowers avoid late payment fees and adverse credit ratings, and provides the borrowers lower rates and fees when agreeing to make payments in this manner.
- Borrowers also receive similar benefits when they agree to have payments withdrawn directly from their accounts and when they use vehicle titles as security for loans. Vehicle title loans offered by mainstream financial institutions are also preferable to the alternative of selling the vehicle in order to receive needed funds or resorting to high rate credit cards.
- The rules should not prohibit refinancings that benefit the borrower. Refinancing and consolidating loans provide much needed assistance to borrowers and helps reduce payments and lowers rates.
- The severe sanctions of imprisonment and cancellation of the contract will cause creditors to be extremely cautious to the extent that they may restrict credit to servicemembers and, therefore, it is very important that the rules clearly address all of the above concerns. The impact of these requirements may also increase costs significantly, which will be passed on to credit union members in the form of higher rates and fees.
Since the submission of the January 10, 2007 comment letter to Dr. Chu, we have continued to hear from our members who have expressed continued concerns with regard to the implementation of this new law. Many of our members are concerned that without critically important clarifications, there may be an adverse impact on their ability to continue to provide servicemembers and their families with the products and services they richly deserve with alternatives to the predatory lending practices that both this Act and the DoDs Report on Predatory Lending seek to eliminate.
A major area of concern is with regard to fees and costs that are to be included in the calculation of the APR, and the resulting effect on the 36% APR ceiling. Our members have mentioned a number of valuable products and services that are offered voluntarily to their members, and are included within the loan or credit if the member elects to purchase them. These include GAP insurance, vehicle warranties, credit insurance, identity theft protection, as well as other valuable products and services.
The concern here is that both the loan and these products are, on an individual basis, priced very competitively. However, combining the costs of these products and services with the loan will very likely result in an APR that exceeds 36%, and will likely prevent credit unions from offering these well-priced valuable services to their military members. We urge DoD to ensure that these products can continue to be offered, without the risk of the 36% APR ceiling being exceeded. Perhaps one means to accomplish this goal is to differentiate between products and services that are offered voluntarily to military servicemembers and those that are required in order to receive the loan or credit, with the latter being included as part of the APR calculation.
In our January 10, 2007 letter, we suggested that the rules should, at a minimum, exclude optional fees and charges from the APR calculation, with a primary example being late fees. Including such fees and charges, which are not included in the APR as defined under the Truth in Lending Act (TILA), would confuse service members and impact the products and services that are offered to them. But aside from the confusion, a number of these fees are impossible to calculate or estimate at the time credit is granted, because they are based on the future behavior of the borrower. These include over-the-limit fees, credit card replacement fees, collection fees, returned check fees, and any other default-triggered fee.
In addition to the fees above, we are also concerned that the Act will jeopardize courtesy pay and overdraft privilege services. TILA does not require these fees be included in the APR, and the difficulties in making this calculation would likely cause credit unions to discontinue these services.
The loss of these services would be detrimental to our troops because of the benefits they provide, which include avoiding additional merchant fees, avoiding the embarrassment that results from bouncing checks, as well as avoiding a negative impact on credit reports. This may be especially important to servicemembers who are deployed on active duty and are concerned about their security clearances.
In terms of oral disclosures, we continue to urge DoD to allow creditors the flexibility to provide disclosures. For example, a creditor should be able to provide oral disclosures by way of a voice system. This can also serve as the mechanism in which the credit is activated, similar to the current system that is used to activate credit cards.
Because of the difficulty in documenting that oral disclosures were given, there should be no other specific requirements to proving these disclosures were provided to the servicemember. A notation in the credit file should be sufficient and serve as evidence that the disclosure was provided and it was understood.
For the disclosures required under the Act, both oral and written, we strongly urge DoD to conduct consumer testing in order to ensure these disclosures will be meaningful and easy to understand. This testing should include research regarding the feasibility of providing two APRs in a manner that will not confuse servicemembers. The implementation of these requirements will be costly, especially for smaller financial institutions and, therefore, it is important for information to be developed that will help our servicemembers understand the credit alternatives that are available to them.
We also note the Act prohibits the creditor from requiring the borrower to establish an allotment to repay the obligation. This provision should not exclude payroll deductions as a means of repayment, especially if this is voluntarily agreed to by the creditor and borrower. Payroll deductions provide a convenient means for making these payments, especially when the servicemember is deployed and is unable to mail or otherwise submit payments. In addition, credit unions often provide lower rates and fees when members elect this method of payment. Preserving the option of payroll deductions, along with their benefits and convenience, will help prevent delinquencies and greater losses for both the servicemembers and the lenders.
As we noted in our January 10, 2007 letter to Dr. Chu, credit unions provide vehicle title loans as a means in which members may receive credit at favorable rates and terms. If vehicle title loans are no longer an option, servicemembers without other financial resources may be forced to sell their car quickly at a relatively low price and use that money instead of the loan. Given this scenario, the servicemember will no longer have a car and will still need a loan in order to purchase another car. A vehicle title loan, as opposed to an additional car loan, will avoid the need and expense of selling the original vehicle. If the servicemember chooses not to sell their car, then the other possible option is to use credit cards, with interest rates often exceeding 30%. The best option is often a vehicle title loan, which offers real savings for servicemembers when offered by mainstream financial institutions, such as credit unions.
In our letter to Dr. Chu, we stressed that the rules implementing this Act should permit loan refinancings to the extent they provide benefits to the servicemembers. Credit unions often work with members who are having difficulties in meeting their loan payment obligations. Refinancing and/or consolidating loans reduces interest rate, reduces the payments, and extends the payment terms. In essence, refinancing and/or consolidations provide much needed assistance to the member and help maintain a positive member relationship, while also avoiding a charge-off of the loan.
Unlike other consumer protections, the Act imposes very strong sanctions for noncompliance, which includes imprisonment and cancellation of the credit transaction. Not only will credit union employees be extremely concerned about the risk of imprisonment, but the reputation of the credit union will suffer significantly, and the undermining of public confidence that would result may spread to other financial institutions. Also, the penalty of canceling the credit transaction may result in significant losses and safety and soundness concerns, as opposed to other common types of penalties, such as fines and the restructuring of the affected terms.
Because of these sanctions, credit unions will be extremely cautious and will avoid any action that may be construed as being in violation of the Act or its implementing rules, which may include denying credit for our servicemembers if there is a possibility such an action would be considered a violation. At the very least, these concerns and the increased obligations will increase costs significantly. The costs incurred in providing oral disclosures will be especially significant. Because credit unions are not-for-profit financial institutions, these costs will have to be passed on to the credit union members, including servicemembers, which will be especially unfair since the purpose of the Act is to help eliminate high-cost predatory lending. For these reasons, it is extremely important that the rules address the issues discussed above so there is no misunderstanding as to what is expected of financial institutions in these situations.
The consumer credit provisions of the John Warner 2007 National Defense Authorization Act, while well intended, has the potential to impact negatively the level of services and products offered by credit unions to military personnel. To ensure no unintended consequences arise from this law, DoDs rules must be written to permit our members to do their job to serve those who serve our country. In that regard, we again ask the Department their fullest consideration of our comments above, and encourage the Department to work with us over the next few months, to make certain the protections afforded by the Act ultimately protect our servicemembers from those organizations who abuse our troops and their families daily --- predatory lenders.
Finally, we want to again commend DoD for including CUNA and DCUC in the rulemaking process at this early stage. As part of the process, we also believe it would be very productive for us to meet with DoD to discuss our comment letters and other issues that may arise. One issue may be to explore how credit unions may further enhance their financial education programs to ensure that servicemembers do not resort to predatory lenders for their financial needs.
Thank you for the opportunity to comment as you continue the process of developing the rules to implement this new military lending law. If you or your staff have questions about our comments, please give us or Senior Vice President and Deputy General Counsel Mary Dunn or Senior Assistant General Counsel Jeffrey Bloch a call at (202) 638-5777.
|Daniel A. Mica
CUNA President and CEO
|Roland A. Arteaga
DCUC President and CEO