MLA and Credit Cards – Late Fees, Returned Payment Fees and More; Prepaids Rule Delayed
Last month, Andre blogged about the bona fide fee exception for credit cards under the Military Lending Act (MLA). Credit unions have continued to ask about specific fees and if they can be excluded as "bona fide and reasonable" under the MLA. I thought we would start the week off with a few specific examples – namely, fees for returned payments, late payments, and some transaction charges.
First, the section 232.4 of the MLA allows credit unions to exclude some fees from the 36% military annual percentage rate (MAPR) cap. Here's the rule describing what is included in the MAPR for reference:
(c) Calculation of the MAPR.—
(1) Charges included in the MAPR. The charges for the MAPR shall include, as applicable to the extension of consumer credit:
(i) Any credit insurance premium or fee, any charge for single premium credit insurance, any fee for a debt cancellation contract, or any fee for a debt suspension agreement;
(ii) Any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit; and
(iii) Except for a bona fide fee (other than a periodic rate) which may be excluded under paragraph (d) of this section:
(A) Finance charges associated with the consumer credit…
The rule goes on to also describe when some application or participation fees could be excluded, but our focus today is on other possible finance charges. Some fees that are finance charges could be excluded in the MAPR calculation for credit cards, if those fees are "bona fide" under the rule. This was clarified in the August 2016 interpretative rule:
- Are fees that a creditor is required to pay by law and passes through to a covered borrower required to be included in the calculation of the MAPR?
Answer: 32 CFR 232.4(c)(1) details the charges that must be included in the calculation of the MAPR. Among the charges that must be included are finance charges associated with the consumer credit. Finance charges are defined by § 232.3(n) to mean a “finance charge” in Regulation Z. If such fees are considered “finance charges” under Regulation Z, then such fees must be included in the calculation of the MAPR, unless they are bona fide fees charged to a credit card account that are excludable under § 232.4(d). However, if the fees are not “finance charges” under Regulation Z, then they may be excluded from the calculation of the MAPR, provided they do not qualify for any of the other categories of charges listed under § 232.4(c)(1). (Emphasis added.)
This seems to clarify that fees that are not finance charges are not included in the MAPR generally (unless specifically included), and some finance charges can be excluded from the MAPR for credit cards – although even under the bona fide fee exclusion, some fees are ineligible for exclusion like credit life insurance or "credit related ancillary products."
When analyzing whether a specific fee is included in the MAPR for a credit card product under the MLA, it is a good starting point to consider whether the fee is a "finance charge" under Regulation Z in the first place. As an example, consider late fees and fees for returned payments. Section 1026.4 of Regulation Z, which defines finance charges, and its commentary note that these kinds of fees are not a finance charge:
(c) Charges excluded from the finance charge. The following charges are not finance charges:
(1) Application fees charged to all applicants for credit, whether or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.
1. Late payment charges.
i. Late payment charges can be excluded from the finance charge under §1026.4(c)(2) whether or not the person imposing the charge continues to extend credit on the account or continues to provide property or services to the consumer. In determining whether a charge is for actual unanticipated late payment on a 30-day account, for example, factors to be considered include:
A. The terms of the account. For example, is the consumer required by the account terms to pay the account balance in full each month? If not, the charge may be a finance charge.
B. The practices of the creditor in handling the accounts. For example, regardless of the terms of the account, does the creditor allow consumers to pay the accounts over a period of time without demanding payment in full or taking other action to collect? If no effort is made to collect the full amount due, the charge may be a finance charge.
ii. section 1026.4(c)(2) applies to late payment charges imposed for failure to make payments as agreed, as well as failure to pay an account in full when due.
2. Other excluded charges.Charges for “delinquency, default, or a similar occurrence” include, for example, charges for reinstatement of credit privileges or for submitting as payment a check that is later returned unpaid. (Emphasis added.)
Read together, since fees that are not considered finance charges under Regulation Z "may be excluded from the calculation of the MAPR" when not otherwise included in the MAPR (i.e. credit life insurance, credit related ancillary products), late fees and fees for returned payments seem to be excluded from the MAPR.
Other transaction fees can be finance charges, but could still be excluded from the MAPR for credit cards accounts. Excerpts from the preamble to the rule discuss excluding charges like cash advance fees as bona fide fees for credit card accounts:
"In the case of open-end credit extended through a credit card account, a creditor likewise would be required to calculate the MAPR using the methods prescribed in § 1026.14(c)-(d) of Regulation Z. For example, if a creditor extends credit to a covered borrower through a credit card account and the borrower incurs a finance charge relating to a specific transaction, such as a cash advance transaction, during the billing cycle, then the creditor would calculate the MAPR under the instructions set forth in § 1026.14(c)(3) of Regulation Z. However, in the case of a credit card account the creditor may exclude, pursuant to § 232.4(c)(1)(iii) and § 232.4(d), any bona fide fee from the finance charges that otherwise must be accounted for; thus, if a charge for the cash advance transaction fits within the exclusion for a bona fide fee under § 232.4(d), then that charge would not be included when computing the MAPR for that billing cycle.
[Credit cards will] be subject to a qualified exclusion for bona fide application fees, participation fees, transaction-based fees, and similar fees connected to the use of the credit card under § 232.4(d).
More precisely, § 232.4(d)(3)(i) would allow [a creditor] to assess the reasonableness of the `cash advance' fee that applies to all four types of transactions by comparing its fee to the fee charged by another group of creditors who cover fewer than those transactions within their own structures of fees. [The rules] do not require a strict correlation among comparators. Even though each transaction that [a creditor] classifies in its cardholder agreement as subject to a `cash advance' fee has distinctive features bearing on a payment (e.g., a traveler's check provides for a countersignature by the consumer-purchaser of the check when he or she negotiates the check), all of the transactions fit within the same class because each allows the cardholder to tender an item or instrument as if it were cash (and instead of the credit card itself)...
To provide additional clarity on the application of the like-kind standard, the Department has modified § 232.4(d)(3)(i) by adding the statement: “Conversely, when assessing a foreign transaction fee, that fee may not be compared to a cash advance fee because the foreign transaction fee involves the service of exchanging the consumer's currency (e.g., a reserve currency) for the local currency demanded by a merchant for a good or service, and does not involve the provision of cash to the consumer.”
Overall, determining which fees may be included in the MAPR requires a detailed factual analysis. Some fees can be excluded because they are not a finance charge and are not otherwise included. Determining whether a credit card fee is "bona fide and reasonable," and thus excluded from the MLA's MAPR calculation, will be fee specific. NAFCU is here to help our members with questions on the MLA, and will continue to advocate for further extension of the October 3, 2017 deadline for credit card compliance.
Prepaids Rule Delayed. On April 20, 2017, the CFPB finalized a six-month delay to the general effective date of the prepaid accounts rule after recognizing that industry participants would have difficulty meeting the original October 1, 2017 effective date. In conjunction with this announcement, the CFPB also said that it plans to revisit substantive aspects of the final rule in a separate notice and comment rulemaking process. The issues under consideration relate to linking credit cards to digital wallets capable of storing funds, error resolution, and limitations on liability for certain prepaid accounts. The CFPB has also hinted at the possibility of using this separate rulemaking process to address "a limited number of other topics," and whether further extension of the effective date would be necessary to address any additional changes to the final rule.