Lawyer Article

The House of Representative and the Senate recently agreed on an act that would place federal usury limitations on extensions of consumer credit to certain members of the armed forces. On September 29, 2006 the John Warner National Defense Authorization Act for Fiscal Year 2007 conference report was filed. It was approved by the House of Representatives the same day and by the Senate the next day. The bill was presented to the president for signature on October 5th and he is expected to sign it in the very near future. The bill went through multiple revisions, but the most recent revision, which was adopted, can be viewed at the following link: HR 5122 (Gov. Printing Office - PDF format) .

The Conference Report of the John Warner National Defense Authorization Act for Fiscal Year 2007 provides the following:

• Effective Date: The law is to take effect on October 1, 2007. An earlier date may be prescribed by the Secretary of Defense, but publication of an earlier date must be made in the Federal Register at least 90 days before the earlier effective date in order for it to take effect. The law only applies to extensions of consumer credit on or after such effective date.
• Regulations: The Secretary of Defense has the authority to prescribe regulations. The regulations are to establish: required disclosures, method for calculating an APR, maximum allowable fees, definitions for key terms (including "consumer credit"), and any other limitations deemed appropriate. The Secretary of Defense is to consult with the FTC, the Board of Governors of the Federal Reserve System, the OCC, the FDIC, the OTS, NCUA and the Treasury Department in promulgating regulations. The Secretary of Defense may also prescribe interim regulations.
• Interest Rate Capped: A creditor who extends consumer credit to a covered member cannot require the member or dependent to pay interest on the extension except as agreed to under the note, as authorized by state or federal law and which is not specifically prohibited. An annual percentage rate of interest greater than 36% is specifically prohibited.
• Prohibited Terms and Practices: Under the law, it would be unlawful for any creditor to extend consumer credit to a covered member or a dependent of such member if:
  o The creditor refinances (in any manner) the consumer credit with the proceeds of the prior credit extended to the same covered member or dependent;
  o The borrower is required to waive his or her right to legal recourse under any applicable state or federal law;
  o The creditor requires the borrower to submit to arbitration or imposes onerous legal notice provisions in the event of a dispute;
  o The creditor demands unreasonable notice from the borrower as a condition for legal action;
  o The creditor uses a check (or similar instrument) or the title of a vehicle as security for the obligation;
  o The creditor requires as a condition for the loan that the borrower establish an allotment to repay an obligation; OR
  o The borrower is prohibited from prepaying the loan or is charged a penalty for prepaying any or all of the loan.
• Consumer Credit: Consumer credit is to be defined under the prescribed regulations. However the definition is not to include a residential mortgage or a purchase-money transaction secured by personal property.
• Interest: Interest is broadly defined to include all costs associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any other charges or premiums and the cost of any other ancillary product sold with the credit.
• Covered Member and Dependent: A covered member is a member of the armed forces who is on active duty (or has an order or call for active duty that does not specify a period of 30 days or less) or is on active Guard and Reserve Duty. A dependent of a covered member includes the member's spouse, child, and any individual for whom the member provided more than one-half of the individual's support for 180 days preceding the extension of credit.
• Required Disclosures: There are three required disclosures that must be made both orally and in writing before the issuance of consumer credit. This includes the extension of credit via the internet. The creditor must disclose the APR of interest that is applicable to the extension of credit. The creditor must disclose all information required under TILA. The creditor must also disclose a clear description of the payment obligations of the member or dependent.
• Preemption: The act explicitly preempts all state and federal law, regulations and rules that are inconsistent, unless the applicable law provides more protection to the borrower.
• Penalties: A creditor who "knowingly" violates these provisions shall be fined or imprisoned for not more than one year. If an extension of credit violates any provision of this law is it VOID from the inception of the contract. All other available remedies are preserved.
• Assignee Liability: Assignees are included in the definition of "creditor."