Question:

I have a question regarding fee and interest rate limitations related to the Military Lending Act.

We currently offer an overdraft line of credit tied to members’ checking accounts, with an interest rate of 18%. If the member chooses to access the line of credit themselves (online, over the phone, or in person with a teller), there is no fee; they simply begin accruing interest on the balance.

However, if the system automatically transfers funds from the line of credit to cover a check, debit card purchase, or ACH transaction, there is a $7.95 transfer fee applied. The fee is also added to the line of credit.

I’m looking for clarification on whether this type of automatic transfer fee would be considered part of the APR calculation under the Military Lending Act, and if so, whether it could potentially put us out of compliance for Reg Z. Should we stop charging this fee on lines of credit to military members?

Answer:

Let’s break this down by law/regulation:

Reg Z: Although transfer fee is a finance charge under Reg Z, there is no Reg Z violation.

Military Lending Act: Because the transfer fee is a finance charge, it must be included in the MAPR, which is calculated each billing cycle. The credit union is most likely exceeding the billing cycle MAPR for these loans, but that will depend on the transfer amount.

Federal Credit Union Act: The credit union is exceeding the Federal Credit Union (FCU) loan rate cap (for all overdraft LOCs) since the FCU Act max rate is 18% “inclusive of all finance charges” and the LOC is already at 18% before factoring in finance charges.

Because the credit union is a Federal Credit Union, the credit union needs to stop charging this fee for everyone.*

It might be possible to change the characterization of this fee from a finance charge to a non-finance charge, by deducting the fee from the checking account instead of charging the LOC. However, the fee still might be considered a finance charge under Reg Z depending on what the credit union charges for paying overdrafts on checking accounts that don’t have an overdraft LOC. Even then, there are still issues. You would need to provide a 30-day advance change in terms notice, update your new account disclosures and you could no longer call the checking account “free” (if you offer free accounts).

*Utah state-chartered credit unions are permitted to charge more than 18% APY on loans, as they are not subject to the FCU Act interest rate cap.