Federal Limitations on Military Consumer Credit Hilary B. Miller, Esq. Jeremy T. Rosenblum, Esq.

Who is burdened: –“Creditor”: a person [as defined in regulations to be promulgated by the SecDef] who extends “consumer credit [defined to exclude mortgages and purchase-money loans for cars and personal property]” to: Who is protected: –“A covered member [defined as “active duty”] of the armed forces or a dependent of such member [defined as spouse, child or person for whom > ½ support]” Effective 10/1/07 unless SecDef regs provide for earlier effective date 2006 Defense Appropriations Bill Restricts Military Credit Terms

A “creditor” cannot impose “an annual percentage rate of interest” > 36%. ≠ “APR” for TILA purposes –Includes all charges, including charges permitted to be excluded for TILA (e.g., credit life insurance, recording fees, service charges, “any other charge”) Limitations on Interest

Rollovers, renewals, refinances, consolidations or refinances of loans from same creditor Mandatory arbitration Waivers of “legal recourse” Check or ACH repayment; vehicle title as security for loan Prepayment prohibitions/penalties Principal Prohibited Acts

Statement of “APR of interest” Disclosures required under TILA –(Note: Not the same!) “Clear description of the payment obligations” “Shall” be presented in accordance with TILA, but cannot be Required Disclosures

Preempts any inconsistent state or federal law, except does not preempt any law providing greater protection Prevents states from authorizing or condoning unpermitted terms Preemptive Effect

SecDef to prescribe by regulation: Disclosures required Method for calculating “APR of interest” Maximum allowable fees for each type of credit Definition of “creditor” and “consumer credit” Any other limitations the SecDef deems appropriate May provide for earlier effective date than 10/1/07 SecDef Regulations

Violation is a misdemeanor — fine and not more than one year in prison Entire contract containing prohibited term (not merely prohibited term) is void ab initio Penalties

Who, exactly, is caught in this web? What classes of “creditors” and forms of “consumer credit” will be excluded from the definitions (banks? credit unions? overdraft protection?) May a creditor rely on a loan applicant’s representation that he is not a “covered member” or dependent? What additional disclosures (may differ from TILA), limitations (may differ from statute), etc. will SecDef prescribe by regulation? Are class-action waivers prohibited? Will mainstream creditors continue to lend to military borrowers at all? Open Questions