Spotlight on the Military Lending Act, Part 2: Planning for ComplianceManley Williams, Andrew W. Grant, Benjamin K. Olson
Compliance with the revised Department of Defense (“DoD”) regulations under the Military Lending Act (“MLA”) is not mandatory until October 3, 2016 or, for most credit cards, until October 3, 2017. However, as the recent implementation of the Dodd-Frank Act mortgage regulations shows, a year or even two can pass quickly. Therefore, institutions should begin planning now. The following are answers to three key questions that can help you start the planning process.
1. Which products will be covered by the revised MLA regulations?
The revised MLA regulations apply far beyond the narrow range of small dollar loan products covered today. Instead, reflecting the DoD’s desire to match to the definition of consumer credit under the Truth in Lending Act’s Regulation Z, the MLA regulations will apply to credit offered or extended to a covered borrower that is:
- Primarily for personal, family, or household purposes; and
- Either subject to a finance charge or payable by a written agreement in more than four installments.
However, the following types of credit are excluded:
- Residential mortgages: Transactions secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling.
- Secured motor vehicle purchase loans: Transactions that are expressly intended to finance the purchase of a motor vehicle and are secured by that vehicle.
- Secured personal property purchase loans: Transactions that are expressly intended to finance the purchase of personal property and are secured by that property.
- TILA-exempt transactions: Transactions that are exempt from Regulation Z (other than pursuant to a State exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z.
Accordingly, the revised MLA regulations should not affect most mortgage, auto, or commercial lending. The new regulations will, however, apply to most credit card accounts, overdraft or personal lines of credit, unsecured closed-end loans, and deposit advance products. Therefore, institutions should focus on preparing the lines of business responsible for these products for compliance with the revised MLA regulations.
2. How will I determine who is a covered borrower?
If a product is covered by the MLA regulations, the next question is whether the borrower is also covered. Creditors must build the systems and train their employees to determine whether the consumer is a “covered borrower” at the time the consumer becomes obligated or establishes an account. To be a covered borrower, the consumer must be either:
- A “covered member,” which is a member of the armed forces who is serving on: (1) active duty under titles 10, 14, or 32 of the United States Code under a call or order that does not specify a period of 30 days or fewer; or (2) active guard and reserve duty under 10 U.S.C. 101(d)(6); or
- A “dependent” of a covered member as described in 10 U.S.C. 1072(2)(A), (D), (E), or (I), which includes: (1) a spouse; (2) a child under 21 (or 23 in certain circumstances); (3) a parent or parent-in-law dependent on the covered member for over one-half of their support and residing in the member’s household; and (4) certain persons over whom the covered member has legal custody.
While a creditor is permitted to use its own method to determine whether a consumer is a covered borrower, the revised regulations provide a safe harbor if the creditor relies on:
- Information obtained directly or indirectly from the DoD’s database; or
- A “statement, code, or similar indicator” of the consumer’s status in a consumer report obtained from a nationwide credit bureau meeting certain criteria.
3. What must be done for extensions of credit subject to the MLA?
When a covered consumer credit product is provided to a covered borrower, the creditor must comply with both substantive restrictions and disclosure requirements.
1. Substantive requirements
The Military Annual Percentage Rate (“MAPR”) cannot exceed 36 percent on a closed-end loan or in any billing cycle for an open-end credit account. Accordingly, creditors must develop systems for calculating the MAPR.
The MAPR is generally calculated consistent with the APR in Regulation Z (for open end transactions, the MAPR is calculated like the “effective APR”). However, while the Regulation Z APR includes only finance charges, the MAPR also includes credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other things. For certain credit card accounts, the MAPR excludes “bona fide” fees that are comparable to fees “typically imposed by other creditors for the same or a substantially similar product or service.”
A number of additional restrictions apply to covered transactions:
- For certain non-depository creditors, roll-overs and vehicle title loans are prohibited.
- The covered borrower cannot be required to waive legal recourse under State or Federal law, submit to arbitration, or comply with “onerous” or “unreasonable” notice requirements.
- The covered borrower cannot be required to establish an allotment to repay the obligation and certain limitations apply to the use of checks or other methods of access to a deposit, savings, or other financial account maintained by the covered borrower.
- Prepayment penalties and restrictions on prepayment are prohibited.
1. Disclosure requirements
Creditors must also build systems and train their employees to provide certain written and oral disclosures.
1. Written disclosures
In addition to the applicable Regulation Z disclosures, a covered borrower must receive “a statement of the MAPR applicable to the extension of consumer credit” before or at the time the borrower becomes obligated on the transaction or establishes an account.
However, rather than providing the numerical value of the MAPR, the following or a substantially similar statement may be included in the agreement with the covered borrower:
Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).
1. Oral disclosures
The creditor must also orally provide the above MAPR statement and a “clear description of the payment obligation” (such as a Regulation Z payment schedule or account-opening disclosure) either in person or through a toll-free telephone number included on the application form or in a written disclosure.