In July 2015, the U.S. Department of Defense issued a final rule expanding the scope of its Military Lending Act (MLA) regulations. The MLA imposes an interest rate limit on extensions of consumer credit made to covered borrowers. The MLA also places conditions and disclosure requirements on lenders who extend consumer credit to covered borrowers. The final rule makes changes to the definition of consumer credit and to lender disclosure requirements and puts in place two new safe harbors available to lenders when making the determination of whether a borrower is a covered borrower for purposes of the MLA.
Coverage. Currently, consumer credit covered by the existing rule is limited to short term, low dollar, closed-end payday type loans; vehicle title loans with terms of 181 days or less; and tax refund anticipation loans. Under the new rules, the definition of "consumer credit" is expanded to include all types of credit covered by Regulation Z/Truth-in-Lending with a couple of exceptions. The final rule covers any extension of credit for personal, family or household purposes to an active-duty service member or dependent that is subject to a finance charge or payable by written agreement in more than four installments. Residential mortgages and purchase money transactions secured by automobiles and other personal property are still excluded. The new rule now covers most types of consumer credit including student loans and overdraft lines of credit. Open-end credit, such as a credit card account, was previously exempt under the MLA. Credit card accounts are no longer exempt, but the rule does not apply to credit card accounts until October 3, 2017, with the possibility of an additional one year extension to be considered later.
Covered Borrower. The final rule only applies to extensions of credit to a "covered borrower" which is a member of the armed forces on active duty or on active Guard and Reserve duty, and their dependents. Dependents can include the spouse and child, and in some cases, a parent or parent-in-law or an unmarried person in the legal custody of the servicemember. The existing rule provides a safe harbor for a lender in making the determination of whether a borrower is a covered borrower by obtaining the borrower's self-certification in a Covered Borrower Identification Statement. That safe harbor will expire on October 3, 2016, but the final rule makes two new safe harbors available. Lenders may conduct a covered-borrower check by using information obtained either from the MLA database or from information in a consumer report from a nationwide consumer reporting agency to determine whether the borrower is a covered borrower. If one of these sources is used and the lender complies with the appropriate time and recordkeeping requirements in the final rule, then a safe harbor will be granted.
MAPR. Consumer credit to a covered borrower is limited to a 36% Military Annual Percentage Rate (MAPR), which is an all-inclusive rate and includes many charges that are excluded from the finance charge and APR under Reg. Z. The final rule provides some guidance in calculating the MAPR and eliminates some prior finance charge exceptions. For closed-end credit, the MAPR is calculated in the same way as the APR under Reg. Z except that it must also include any charges for credit insurance, debt cancellation or suspension products, application fees, participation fees, and fees for any ancillary products sold in connection with the credit extension.
The MAPR for open-end credit is calculated in the same way as the effective APR for a billing cycle under Reg. Z and includes all of the fees included for closed-end credit. As a result, a fee may not be charged in a billing cycle where there is no balance except for a participation fee not in excess of $100 per year. And, the final rule carves out of the MAPR certain credit card fees -other than a periodic rate- such as application fees, participation fees, or transaction-based fees if the fee is bona fide and reasonable. Reasonableness is determined by comparing the fee with fees typically imposed by other creditors for a similar product. A safe harbor is provided for a fee that is not more than the average amount charged by 5 or more creditors who have U.S. credit cards with outstanding balances totaling at least $3 billion at any time during the 3-year period preceding the time the average is computed. This exclusion does not apply to credit insurance premiums, debt cancellation or debt suspension fees, or any ancillary product fees. And, if a creditor charges any fee that is not bona fide or reasonable in addition to a finance charge included in the MAPR, then the total amount of all fees must be included in the MAPR even if some of the fees might have otherwise been excluded.
Disclosures. The disclosure requirements were amended in several ways. First, the requirement for clear and conspicuous disclosures was removed. Second, the final rule simplifies the information a creditor must provide. In addition to disclosures required by Reg. Z, a creditor must provide a statement of the MAPR that describes the charges the creditor may impose, but the creditor will no longer be required to provide the computed MAPR or the total dollar amount of the charges. Instead, the final rule provides a model statement describing the MAPR, and a creditor may use the model statement or a substantially similar statement. Also, the requirement for creditors to provide a specific statement regarding protections available under federal law was removed.
The creditor must also provide a clear description of the payment obligation, which can be satisfied by using the payment schedule or account-opening disclosures under Reg. Z. In addition to the written disclosures required, the creditor must provide orally the statement of the MAPR and the description of the payment obligation. However, a creditor may now provide the oral disclosures either in person or by providing a toll-free number the borrower may use to obtain the disclosures. If the creditor elects to provide a toll-free number, it must include that number on the application form or with the statement of the MAPR.
Limitations and Prohibitions. Creditors are prohibited from requiring covered borrowers to submit to arbitration and any arbitration provision is unenforceable. A creditor other than a bank, savings association or credit union is prohibited from accepting a vehicle title as security for a loan and from rolling over or renewing covered consumer credit with new covered consumer credit by the same lender. Creditors are prohibited from: using a check or other means of accessing a deposit account, except for a security interest in funds deposited after the extension of credit; requiring use of an allotment to repay the obligation; imposing any prepayment penalty on covered credit; or requiring covered borrowers to waive any right to legal recourse under any state or federal law, including the SCRA.
Penalties. If a creditor fails to comply with the MLA, then the contract with the borrower is deemed void from inception. Also, creditors may be exposed to civil liability for violations including actual damages of not less than $500 per violation, punitive damages and declaratory relief as allowed by a court, and reasonable attorneys' fees and expenses. Criminal penalties are provided for knowing violations.
Effective Date. The final rule is effective as of October 1, 2015 but only applies to consumer credit transactions with a covered borrower entered into on or after October 3, 2016. In addition, credit card accounts are not included in the definition of "consumer credit" until October 3, 2017. The civil liability provisions apply to consumer credit extended on or after January 2, 2013.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
