The Military Lending Act (MLA) has gone mainstream. First enacted in 2006, the MLA’s aim was to provide protections against predatory lending practices targeted at U.S. service members and their spouses and dependents. But while it once applied only to a short list of credit products, new regulations have greatly broadened its coverage. Now, MLA compliance should make most creditors stand at attention.
As originally adopted, the MLA capped interest rates, retained certain legal rights for borrowers, prohibited certain loan features, and required creditors to make certain written and oral disclosures of interest rates and payment obligations before issuing a loan. But the Act only applied to payday loans, vehicle title loans and tax refund anticipation loans. Compliance was, therefore, not a pressing concern for lenders that did not provide these offerings.
The situation changed dramatically last July with new regulations issued by the U.S. Department of Defense (DoD). Now a large group of creditors, along with a greatly expanded list of credit products, are covered by the Act.
According to the DOD, the substantial changes are, in part, intended to address short-term, small dollar lenders that avoided MLA restrictions by offering slightly modified loan terms that fall outside the Act’s scope. However, the new rules extend well beyond small dollar loan products.
While I recommend every creditor does its own deep-dive review of these complex new rules, I’ll highlight several key changes.
- Much broader definition of “consumer credit”: The definition now encompasses any credit extended to a “covered borrower” for personal, family or household purposes that is subject to a finance charge or is payable by written agreement in more than four installments. This applies to both closed-end and open-end credit, including installment loans, boat loans, single payment loans, lines of credit, credit cards and other consumer credit transactions. Only a few credit products are exempted. These include loans to purchase or refinance a home, home equity lines of credit, and auto finance loans where the loan is secured by the vehicle.
- Military Annual Percentage Rate: Perhaps the most challenging part of the new rules is the calculation and potential impact of the Military Annual Percentage Rate (MAPR). Under the MLA, covered credit transactions are capped at a 36% MAPR. The regulations governing how to determine what must be included in the MAPR are quite detailed, with a distinct set of rules for credit cards. As a quick summary, the MAPR covers all interest and fees associated with the loan, and now must also include charges for most ancillary “add-on” products such as credit default insurance and debt suspension plans. For closed-end credit, the MAPR will be a one-time calculation made prior to or at the time the loan is made. For open-end credit transactions, the MAPR must be calculated for each billing cycle.
- Verifying active duty status: Creditors will need to screen every applicant who applies for any credit product covered under the MLA. Previously, creditors could simply ask applicants whether they were active duty service members or a spouse/dependent. But under the revised rules, creditors are only granted legal safe harbor if they employ one of two methods for conducting a covered-borrower check: (1) access a DoD online database that details active duty status; or (2) rely on information in a consumer report from a national consumer reporting agency (CRA). Of course, how this plays out in the real world is another matter. Indeed, there are several outstanding concerns, including the 24/7 reliability of the DoD online option, as well as whether there is sufficient time for the three major CRAs to build a solution that not only includes data on active duty status but also identifies spouses and dependents. Note that compliance is required by October 3, 2016, except for credit card products, where it’s October 3, 2017.
One such example is the Servicemembers Civil Relief Act of 2003 (SCRA), which replaced a similar 1940 law. The SCRA provides certain protections for military personnel while on active duty, such as interest rate caps for many consumer credit products, a prohibition against foreclosure and protection from repossession of personal property. Federal regulators are increasing their focus on SCRA compliance as part of their supervisory duties.
Similarly, soon after the DoD issued the revised MLA rules, the CFPB signaled that MLA compliance would be a key emphasis for the Bureau, which has primary enforcement authority. Needless to say, if the MLA isn’t already on your institution’s radar, it is time to add it to your growing compliance checklist for 2016.