On August 31, 2007, the U.S. Department of Defense issued final regulations implementing the Talent Amendment, also known as Section 670 of the John Warner National Defense Authorization Act for the Fiscal Year 2007 (“Act”). The regulations are meant to regulate the terms of certain credit extensions, including payday loans, vehicle title loans and refund anticipation loans, to active duty service members and their dependents. The final regulations will take effect on October 1, 2007, and will apply only to consumer credit extended by creditors to a covered borrower and consummated on or after October 1, 2007.

    The regulations generally apply to a “creditor,” which is defined to include a person engaged in the business of extending consumer credit with respect to a consumer credit transaction covered by the regulations. “Consumer credit,” is expressly limited to closed-end credit offered or extended to a covered borrower primarily for personal, family or household purposes, and is defined to include the following transactions:

    • Payday loans, meaning closed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000 and the covered borrower: (i) receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously with the receipt of funds, provides a check or other payment instrument to the creditor who agrees with the covered borrower not to deposit or present the check or payment instrument for more than one day or (ii) receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously with the receipt of funds, authorizes the creditor to initiate a debit or debits to the covered borrower’s deposit account (by electronic fund transfer or remotely created check) after one or more days.
    • Vehicle title loans, meaning closed-end credit with a term of 181 days or fewer that is secured by the title to a motor vehicle that has been registered for use on public roads and owned by a covered borrower, other than a purchase money transaction described in Section 232.3(b)(2)(ii) of the regulations.
    • Tax refund anticipation loans, meaning closed-end credit in which the covered borrower expressly grants the creditor the right to receive all or part of the borrower’s income tax refund or expressly agrees to repay the loan with the proceeds of the borrower’s refund.

    A “covered borrower” is defined as a person, at the time he or she becomes obligated on the transaction, who is (i) a regular or reserve member of the Army, Navy, Marine Corps, Air Force or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 U.S.C. Section 101(d)(6), or (ii) the member’s spouse, the member’s child as defined in 38 U.S.C. Section 101(4) or an individual for whom the member provided more than one-half of the individual’s support for 180 days immediately preceding a covered extension of consumer credit.

    Generally, a creditor or its assignee who extends consumer credit to a covered member or dependent may not require the member or dependent to pay a military annual percentage rate (“MAPR”) with respect to such extension of credit, except as (i) agreed to under the terms of the credit agreement or promissory note, (ii) authorized by applicable state or federal law and (iii) not specifically prohibited by the regulations. Moreover, the regulations define MAPR to include the following cost elements associated with the extension of credit if they are financed, deducted from the consumer credit proceeds or otherwise required to be paid as a condition of the credit: interest, fees, service charges, credit renewal charges, credit insurance premiums (including charges for single premium credit insurance), fees for debt cancellation or debt suspension agreements and fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction. Specifically, a creditor or its assignee may not impose an MAPR greater than 36% in connection with an extension of consumer credit to a covered member or his/her dependent.

    When extending consumer credit (including any such credit originated or extended through the internet) to a covered borrower, a creditor must provide to the member or dependent the following information clearly and conspicuously before consummation of the consumer credit transaction:

    1. The MAPR applicable to the extension of consumer credit, and the total dollar amount of all charges included in the MAPR;
    2. Any disclosures required by Regulation Z;
    3. A clear description of the payment obligation of the covered borrower, as applicable (a payment schedule provided pursuant to Regulation Z requirements satisfies this requirement); and
    4. A statement discussing protections under federal law for military members.

    The creditor must provide these disclosures in writing in a form the covered borrower can keep, and also must provide the disclosures required by items (i), (iii) and (iv) above orally before consummation.

    A creditor is prohibited to extend consumer credit to a covered borrower as to which the creditor(i) rolls over, renews or consolidates any consumer credit extended to a covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower, unless the new transaction results in more favorable terms to a covered borrower, such as a lower MAPR, (ii) requires a covered borrower to waive his/her right to legal recourse under any otherwise applicable provision of state or federal law (including any provision of the federal Servicemembers Civil Relief Act), the Act or the regulations, (iii) requires a covered borrower to submit to arbitration or imposes other onerous legal notice provisions in the case of a dispute, (iv) demands unreasonable notice from the covered borrower as a condition for legal action and/or (v) uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, or uses the title of a vehicle as security for the obligation, except that, in connection with a consumer credit transaction with an MAPR consistent with Section 232.4(b), the creditor may: (a) require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by Regulation E (Electronic Fund Transfers) 12 CFR Part 205, (b) require direct deposit of the consumer’s salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law or (c) take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction, if not otherwise prohibited by applicable law.

    As a safe harbor, the regulations do not apply to a consumer credit transaction if the creditor (i) provides an applicant, prior to the applicant’s becoming obligated on a transaction, a clear and conspicuous “covered borrower identification statement” substantially similar to the statement set forth in Section 232.5(a)(1) and each applicant signs the statement indicating that he/she is not a covered borrower and (ii) has not determined pursuant to the optimal verification procedures in Section 232.5(b) and (c) that such applicant is a covered borrower.

    Ten U.S.C. Section 987 as implemented by the regulations preempts any state or federal law, rule or regulation, including any state usury law, to the extent such law, rule or regulation is not preempted by such regulations to the extent that it provides protection to a covered borrower greater than those protections provided by 10 U.S.C. 987 and the regulations. Different treatment under state law of covered borrowers is prohibited. States may not: (i) authorize creditors to charge covered borrowers interest rates that are higher than the legal limit for residents of the state or (ii) permit the violation or waiver of any state consumer lending protection that is for the benefit of residents of the state on the basis of the covered borrower’s nonresident or military status, regardless of the covered borrower’s domicile or permanent home of record if the protection otherwise would apply to the covered borrower.

    Nothing in the regulations may be construed to limit or otherwise affect the applicability of Section 207 (relating to the maximum rate of interest on debts incurred before military service) and any other provisions of the Federal Servicemembers Civil Relief Act.

    If you should require help in complying with the regulations or would like assistance in drafting a safe harbor identification statement, we would be glad to assist you.

    • Jeffrey Langer and Kathleen Manley