Another MLA FAQ: Is the Credit Card Rule Retroactive?
Over the past several months, the NAFCU Compliance Team has written a few blogs on various aspects of the MLA credit card rules: Bona Fide Fee Exemption; Late Fees, Returned Payment Fees and More and Researching Call Reports and Card Agreements. With the credit card compliance deadline fast approaching, we continue to receive a number of questions on the MLA and its various credit card rules. Today's blog will focus on one particular issue that has come up for various credit unions lately: whether the rules apply retroactively.
The scenario goes somewhat like this: Jane Member opens a credit card before the compliance deadline. Jane is a covered borrower at the time she opens the credit card and remains a covered borrower throughout the life of the credit card. Does the MLA apply to transactions Jane makes on her credit card after October 3? What if Jane requests an increase in her credit limit after October 3, is the credit card now covered by the MLA?
Section 232.2 explains that the MLA applies to "consumer credit" extended to a "covered borrower," as determined at the time the member "becomes obligated on a credit transaction or establishes an account for credit." This suggests that whether a particular transaction is covered by the MLA is determined at consummation. This is supported by the fact that sections 232.12 and 232.13 state the rules do not "apply to [a credit card account] that is extended and consummated before October 3, ." This is further supported by a couple different discussions in the preamble to the final rule:
"The Department proposed to add new subsection (a), stating: “Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit.” The Department continues to believe that defining the scope of the regulation to apply only to a covered borrower when he or she enters into a transaction or establishes an account for consumer credit is consistent with the language and structure of 10 U.S.C. 987. Interpreting 10 U.S.C. 987 as applying only to a covered borrower who holds that status when he or she agrees to obtain the consumer credit is fair to the creditor who, at the outset of the transaction, should be in a position to know the status of its counterparty to the agreement." (Emphasis added.) See, 80 Fed. Reg. 43579.
Section 232.12(b) provides a general rule that the definitions, conditions, and requirements of the existing rule apply to transactions involving consumer credit that are consummated or established prior to the compliance date. Relative to the Proposed Rule, the language in § 232.12(b) has been revised to clarify that the “definitions, conditions, and requirements” of the existing rule apply. The Department believes that this provision is equitable, particularly to avoid the potential injustice and operational difficulties that could arise if new requirements under the final rule were to apply to pre-existing transactions or accounts involving consumer credit to covered borrowers. (Emphasis added.) See, 80 Fed. Reg. 43591.
All this together seems to indicate that by “establishing” an account or “extending” credit the DOD was referring to consummation. The preamble discussion indicates that the DOD believes that credit unions are in the best position to determine whether a transaction is covered at the outset and there is no ongoing requirement to ensure the transaction is still not covered. The preamble also explains that the DOD does not expect credit unions to apply the rules retroactively to existing accounts as this may cause unnecessary operational problems. If an account was not covered at consummation, it will not become covered later on.
The DOD appears to apply the same logic to certain changes to existing credit accounts. Increasing a credit is not considered "extending" credit under the MLA if the account and its terms are already established:
"A comment on behalf of certain credit card issuers seeks clarification regarding the potential effects of certain 'customer management actions, such as credit line increases.' The Department believes that an action by a creditor within an existing account, such as to increase the available credit that a consumer may draw upon in an account, does not alter the status of the creditor's prior determination for that account." (Emphasis added.) See, 80 Fed. Reg. 43578.
While the DOD specifically includes credit limit increases as actions within an existing account, it does not expand on what other actions may be "within an existing account." Whether other actions, such as adding a joint owner or changing a rate, will trigger MLA protections is unclear from the rule. For these changes, a credit union may need to review its underwriting process and internal procedures to make a determination whether new credit is being extended or a member is becoming obligated on or establishing credit. Some considerations may be whether the credit union performs new underwriting, whether the member will take on any new or different legal obligations, or whether new agreements or disclosures will be provided. The credit union may also want to reach out to its attorney to assist the credit union in making a determination or assessing the particular legal risks involved.