ABA Regulatory Policy and Compliance Inbox: Are late fees covered by the SCRA’s six percent cap on interest?

The intent of the SCRA was to ensure service members are not disadvantaged by their service and do not suffer legal disadvantages because of their absence from home or their job — not to allow service members to mismanage debt obligations.

By Leslie Callaway, CRCM, CAFP and Rhonda Castaneda, CRCM

Tf a customer has a loan with the bank subject to the Servicemembers Civil Relief Act (SCRA) and is late on a payment, must the bank waive late fees and/or refrain from reporting late payments to a consumer reporting agency?

SCRA does not prohibit imposing late fees. The question is whether late fees must be included in the calculation of “interest,” which §3937 caps at six percent for servicemembers on loans extended prior to their entering service. It is not clear that “interest” includes late fees.

Section 3937 of the SCRA defines interest as including “service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.” The term “fees” is not defined, but it is reasonable to conclude that the term “fees” was not intended to include late fees. That would force banks to waive late fees or re-calculate the interest rate to include any late fees. In addition, it would encourage service members not to pay bills on time, since there would be no incentive for doing so. The intent of the SCRA was to ensure service members are not disadvantaged by their service and do not suffer legal disadvantages because of their absence from home or their job — not to allow service members to mismanage debt obligations.

However, as noted, because §3937 does not define the term “fees,” a service member could dispute a bank’s decision to charge a late fee under §3937. In addition, under §3933 servicemembers may request a court to reduce or waive a penalty for their failure to perform pursuant to a contract. Some banks do, as a matter of policy, waive late fees for service members.

Regarding consumer reports, §3919 of the statute only prohibits reporting adverse information relating to servicemembers’ creditworthiness when that adverse information is due solely to the exercise of their rights under the SCRA, e.g., to only pay six percent interest when the contract provided 10 percent. Nothing in the statute prohibits reporting of negative information due to failure to make timely payments. (Answer provided May 2023.)

Do the Equal Credit Opportunity Act and Regulation B apply to loan servicing?

Yes. ECOA and Regulation B cover every aspect of a loan transaction from preapproval to pay off, and loan servicing is one aspect of a credit transaction. The definition of “credit transaction” at §1002.2(m) covers not just applications but existing extensions of credit, refers to collection procedures as well and states: “Credit transaction means every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit (including, but not limited to, information requirements; investigation procedures; standards of creditworthiness; terms of credit; furnishing of credit information; revocation, alteration, or termination of credit; and collection procedures).”

In addition, section 12 CFR 1002.4(a) states that “a creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction” (emphasis added). Comment 1 to this section states that it covers “all dealings, without exception, between an applicant and a creditor, whether or not addressed by other provisions of the regulation” (emphasis added). (Answer provided May 2023.)

My bank’s ATMs do not accept deposits. Is Regulation CC (Expedited Funds Availability Act) signage explaining funds availability still required on the ATM? What signage is required?

Because the ATMs do not accept deposits, Regulation CC signage is not required. However, there may be other notification requirements.

For example, if the bank imposes a fee for using the machine for initiating an electronic fund transfer or for a balance inquiry, the bank must provide a notice on the ATM screen or on paper dispensed before the cardholder commits to the transaction that a fee will be imposed for those services and the amount of that fee. See Comment 1 to §1005.9(a)(1) of Regulation E (Electronic Fund Transfer Act).

There may also be requirements imposed by state law where the ATM is located. Card networks agreements may require that the logo for the network appear on or at the machine. (Answer provided May 2023.)

My bank is subject to the Home Mortgage Disclosure Act (Regulation C), and it has met the covered open-end loan threshold in 2021 and 2022 and will begin reporting these loans on its Home Mortgage Disclosure Act loan/application register in 2023. For reporting purposes, does the bank use the calendar year of the application date or the calendar year of the date on which final action was taken?

The bank reports the year in which final action is taken. Thus, any application for a covered loan made in 2022 on which final action is taken in 2023 should be reported in 2023.

See Comment 14 to §1003.4(a)(8)(i) which states: “An institution does not report any covered loan application still pending at the end of the calendar year; it reports that application on its loan/application register for the year in which final action is taken.” (Answer provided May 2023.)

My bank is subject to the flood insurance escrow rules and is extending a loan secured by a first lien on a consumer’s second home, which is located in a designated flood zone. Is the bank required to escrow for the flood insurance premiums since this is a first lien position even though it is not the borrower’s principal residence?

Yes, it is. There are a few exceptions to the flood insurance escrow requirements but the fact that the property is a second home is not one of them.

(§339.5(a)(1), Federal Deposit Insurance Corporation, §208.25(e)(1)(i), Federal Reserve Board, and §22.5(a)(1), Office of the Comptroller of the Currency) (Answer provided March 2023.)

Under the Bank Secrecy Act recordkeeping rules for wires, payment orders in the amount of $3,000 or more that a bank accepts as an originator’s bank, the bank must obtain the “identity” of the beneficiary’s institution (31 CFR 1020.410(a)(1)(i)). Does “identity” of the beneficiary’s institution mean the institution’s name and address, or does a routing number alone suffice?

The routing number (or SWIFT number, if it’s an international payment) is sufficient to identify the bank. Banks may ask for the beneficiary bank name and address to ensure that the routing number is correct, or, in some cases for international payments, the branch code matches the bank’s address where the account is housed. (Answer provided May 2023.)

Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice.