Complying with the New Military Lending Act Rules

The Military Lending Act of 2006 (MLA) aims to protect U.S. service members, their spouses, and their dependents from predatory lending practices. As originally implemented, the MLA:

  • capped interest rates on consumer credit at a 36% Military Annual Percentage Rate (MAPR);

  • allowed covered borrowers to keep certain legal rights;

  • prohibited certain features and practices including prepayment penalties, payroll allotments and continual refinancing; and

  • required oral and written disclosures of interest rates and obligations (in-person, or via toll-free number).

Initially, the MLA only applied to closed-end payday, tax refund anticipation, and vehicle title loans, but after a review by the U.S. Department of Defense (DoD) and the Consumer Financial Protection Bureau (CFPB), the DoD published a Final Rule amending the MLA in July of 2015. These new rules went into effect on October 3, 2016 and include three key areas of note.

BROADENED COVERAGE

The new rules vastly broaden the types of "consumer credit" covered by the MLA, bringing it more in line with the Truth in Lending Act (TILA) and Regulation Z. The MLA now covers any credit for personal or household use that has a finance charge or is payable by written agreement in more than four installments, including credit cards, installment loans, payday loans, and lines of credit. The new rules exclude credit transactions used to finance personal property purchases such as secured auto financing loans, home mortgage loans, or home equity lines of credit, however.

ELIGIBILITY VERIFICATION

Under the new "safe harbor" rules, creditors must screen every applicant for a covered product via one of two methods: the DoD's own MLA database, or through a national Consumer Reporting Agency (CRA) or reseller who obtains a report from a CRA. Creditors must verify dependents under the age of 18 directly with the DoD database, and creditors may only rely on a verification upon for a limited period of time not exceeding 60 days.

MAPR CALCULATIONS

The MAPR 36% limit now includes all finance charges, interest, and fees, along with charges for credit default insurance, debt suspension plans, application and participation fees, and similar "add-on" products. The new rule excludes certain fees from the limit if they are reasonable and "bona fide" such as annual fees, cash advance fees, and application fees for credit card accounts.

This is one of the most significant changes and one that lenders will have to keep close watch on, since ancillary fees can quickly add up. Lenders may choose to waive some of these fees to meet the maximum 36% MAPR requirement.

KEY COMPLIANCE FACTORS

Although compliance is generally mandatory as of October 3, 2016, the compliance deadline for open-end credit cards is October 3, 2017, with the possibility of a further one-year extension at the discretion of the Secretary of Defense. Creditors not in compliance are subject to civil liability or criminal misdemeanor charges, and credit agreements not abiding by the MLA and its new rules may be voided.

Affected institutions should be sure to review related policies, in particular:

  • processes and policies for providing both oral and written disclosure;

  • methods for verification of a borrower's covered status; and

  • methods for calculating the MAPR and tracking any fees which apply.