In July 2015, the Department of Defense (DoD) passed major changes to the Military Lending Act (MLA) with target compliance dates of October 3, 2016 and October 3, 2017. The 2017 date applies only to credit cards.
The MLA’s overall goal is to prevent predatory lending against U.S. active military service members and their spouses and dependents. More specifically, the MLA caps overall Military Annual Percentage Rates (MAPR) at 36% and requires creditors to make certain written and oral disclosures. It also prevents some loan features, such as prepayment penalties and securing a loan with a personal check or bank account access.
However, the original act only applied to payday loans, tax refund anticipation loans, and vehicle title loans. The new MLA regulations significantly expand the applicable consumer credit products, along with several other key changes.
The new MLA definition of consumer credit more closely aligns with the broader definition of consumer credit found in the Truth in Lending Act (Regulation Z). It includes 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. Exempt products include, but are not limited to, home loans, home equity lines of credit, and auto finance loans secured by the vehicle.
To be granted legal safe harbor for included products, a lender must directly or indirectly check to see if an applicant is in the DoD database. The indirect check would be through one of the three national consumer reporting agencies (CRAs).This is a big change from just asking applicants whether they were on active duty or directly related to someone on active duty.
The trickiest part of the new rules is likely calculating and enforcing the maximum Military Annual Percentage Rate (MAPR) of 36%. Rules in the MLA as to what must be included in calculating a MAPR are very thorough. Included in the MAPR, along with an APR, are fees associated with the loan and charges for “add-on” products such as credit default insurance. For open end credit transactions, the MAPR must be calculated for each billing cycle. For closed end credit, the MAPR is calculated one time, up front, prior to or at the time the loan is made.
Finally, the MLA requires specific loan disclosures in connection with the extension of credit. Lenders must provide certain written and verbal information before issuing credit. This includes, a statement of the applicable MAPR, any disclosures required under Regulation Z, and a clear description of the payment obligations of the service member, spouse, or dependent.
In order to be ready for the approaching 2016 and 2017 deadlines, lenders should be considering the following:
• What product offerings are in scope for the 2016 and 2017 deadlines?
• If not already authorized to directly check the DoD database, what steps should be taken to indirectly check the DoD database by requesting it be included in a consumer credit report?
• How will MAPR be calculated if someone is a covered borrower?
• What new and/or modifications to existing disclosures are required?
• Will utilized vendors be ready in time to meet the deadline?
Even now, only several months before the 2016 implementation date, there are still new details coming out on how to comply. If not already planning, starting now can avoid a rush to the October 3, 2016 deadline.
Stay tuned for future posts on this important topic as new information becomes available.