We are a Federal Credit Union. We offer an overdraft line of credit tied to members’ checking accounts, with an 18% interest rate. Members can access the line themselves (online, over the phone, or at a branch) without any fees—just the standard interest applies. However, if the system automatically transfers funds from the line to cover a check, debit card transaction, or ACH, we charge a $7.95 transfer fee, which is added to the credit line. Under the Military Lending Act, does this automatic transfer fee count toward the Military APR (MAPR) calculation, and could it create a compliance issue under Regulation Z?
Yes. The $7.95 transfer fee is a finance charge under Regulation Z and therefore must be included in the MAPR calculation under the Military Lending Act for loans made to members of the military. While the credit union is not out of compliance with Reg Z, it is likely exceeding the MAPR limit during some statement cycles, depending on the amount of the transfers.
But that’s not the biggest issue. By charging this fee the credit union is exceeding the federal credit union loan interest rate cap, which is set by the NCUA at 18% “inclusive of all finance charges.” Since the overdraft line of credit already carries an 18% interest rate, adding any finance charge—such as this fee—puts the credit union over the cap.
The credit union needs to stop charging this fee for all members, not just those in the military.
As an alternative, it may be possible to deduct the fee from the checking account instead of adding it to the line of credit. However, this fee might still be considered a finance charge under Reg Z depending on how the credit union handles overdrafts for accounts that do not have an overdraft line of credit. This option also introduces additional compliance issues:
In short, the safest and most compliant course of action is to eliminate the fee entirely.
For more information, email Heather Line.
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Using the above phone number and email address, you can gain access to a knowledgeable team that’s ready to address all your credit union’s compliance inquiries — promptly and efficiently. With the Compliance Hotline, you can proactively respond to impromptu questions and issues by getting clarity and insight on technical topics that normally slow you down. We want to help you unlock the full potential of your League membership by leveraging the resources and support you need to navigate the complex world of compliance effortlessly. We’re ALWAYS just a phone call or email away!
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For more information, email Lisa Quaranta.
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