MLA: Credit Cards and the Bona Fide Fee Exemption
Happy St. Patrick's Day compliance aficionados! I hope you are wearing green and that you have plans to enjoy a green beer before the day is over. Today, I'd like to continue addressing nuances with the Military Lending Act, focusing on a credit card specific issue."
Under the MLA, a credit union may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit. For credit card accounts, credit unions are not required to comply with DoD's July 2015 rule until October 3, 2017. The DoD gave this additional time given the increased level of complexity for implementing the rules for credit cards.
Generally, the MAPR for open-end credit should be calculated following the rules for calculating the effective APR for a billing cycle as set for in 12 CFR 1026.14 (c) and (d) of Regulation Z. For consumer credit extended in a credit card account under an open-end (not home-secured) consumer credit plan, a bona fide fee, other than a periodic rate, is not a charge required to be included in the MAPR calculation, provided the fee is both bona fide and reasonable for the type of fee. Note, there is no exclusion for bona fide fees on accounts that are not credit card accounts.
The MLA allows credit unions to exclude bona fide and reasonable credit card fees from the MAPR calculation. Section 232.4(d)(3) uses a "like-kind standard" to assess the reasonableness of bona fide fees and contains a safe harbor provision that is based on comparing the credit union's fees to five other creditors meeting certain standards. The rule also specifies that the exclusion for bona fide fees on credit card accounts does not apply to the following fees:
- Any credit insurance premium or fee, including any charge for a single premium credit insurance, any fee for a debt cancellation contract, or any fee for a debt suspension agreement; or
- 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.
To be considered "reasonable" under the safe harbor provision, a bona fide fee must be compared to fees typically imposed by other creditors for the same or substantially similar product or service. The rule explains how to make the safe harbor calculation:
…the amount of the fee is less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by 5 or more creditors each of whose U.S. credit cards in force is at least $3 billion in an outstanding balance (or at least $3 billion in loans on U.S. credit card accounts initially extended by the creditor) at any time during the 3-year period preceding the time such average is computed. (Emphasis added).
This comparison is designed to be an "elementary like-kind standard" but has created confusion as to how to make this calculation. An excerpt from the preamble to final MLA rule explains this comparison in the following way:
"…The like-kind standard does not require a creditor to compare its rewards program to other rewards programs, per se; rather, the like-kind standard requires a creditor to assess the reasonableness of the fee charged for its rewards program to the fees charged by other creditors for their rewards programs, respectively. In this way, the like-kind standard does not allow a creditor to compare a “rewards program fee” (an amount other than zero) to the “foreign transaction fee” charged by another creditor (which could be, say, three percent of the amount of the purchase) in order to assess whether its reward program fee is reasonable under § 232.4(d)(1)."
So how do you compare your credit card fees to those assessed by five other creditors, or find out which creditors have $3 billion or more in outstanding credit card balances? In the preamble, DoD stated that creditors may use publicly available information regarding credit cards in force and/or fees charged on those credit cards, such as Securities and Exchange Commission filings, Call Reports, and credit card agreements posted on the CFPB's website (http://www.consumerfinance.gov/credit-cards/agreements/), agreements posted on creditors' own websites.
Credit unions should also note that in the August 2016 MLA Interpretive Rule, DoD noted that "nothing in 32 CFR part 232 prohibits a credit card issuers from relying on information sources compiled in commercially available databases or other industry sources in safe harbor calculations."
In the event a bona find fee is higher than an average amount calculated using the safe harbor standard, the fee may still be reasonable depending on other factors relating to the credit card account. MLA does not consider a fee charged by a credit union as unreasonable solely because other creditors do not charge a fee for the same or substantially similar product or service.
NAFCU will continue to seek guidance from the DoD to help our members comply with the updated version of the Military Lending Act. NAFCU also formally requested that the DoD extend the implementation deadline so credit unions have more time to comply.