On July 21, 2015, which also happened to be the fifth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Department of Defense issued a final rule amending changes to the rule that implements the federal Military Lending Act (“MLA”). The MLA, which was passed in 2006 to provide certain protections for active duty service members and their dependents in consumer credit transactions, caps the interest rate on covered loans at 36 percent. The amended rule expands existing coverage of various credit products and imposes new requirements for those products that are covered. A proposed version of the rule had previously been published in the Federal Register in September 2014.
The existing protections of the MLA and its implementing regulation generally apply to payday loans, vehicle title loans, and refund anticipation loans. The revised regulation will expand the definition of “consumer credit” to cover generally any consumer credit offered or extended to active-duty servicemembers or their dependents that is subject to a finance charge or payable by written agreement in more than four installments. In other words, the protections afforded by the MLA will now extend not only to payday loans, vehicle title loans, and refund anticipation loans but also to deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. Residential mortgages and credit extended to finance the purchase of, and secured by, personal property (e.g., vehicle purchase loans) will continue to be excluded from the rule.
In effect, the new rule will eliminate exemptions based on the length and amount of the consumer credit that are currently present in the MLA. The definition of “consumer credit” under the new rule is more consistent with the definition of credit under the Truth in Lending Act. The result is that many products offered by banks and credit unions will now be covered by the rule, because the regulation does not exempt those institutions. The Department of Defense indicated in the final rule that it “is confident that an insured depository institution or insured credit union that places the fair treatment of its consumers at the core of its mission still could find appropriate methods to provide to covered borrowers credit products that comply with the interest-rate limit and other requirements of [the Military Lending Act.]”
Under the regulation, the Military Annual Percentage Rate (“MAPR”) for a covered product may not exceed 36%. This is not a new requirement, but it is an important one. MAPR generally encompasses all interest and fees associated with the loan, including fees for most add-on products such as credit default insurance and debt suspension plans, even though the fees for such products would not be included in the APR calculation under the Truth in Lending Act and Regulation Z. There are some exemptions for certain fees on credit card accounts.
The new rule also prohibits a lender from requiring service members to: submit to mandatory arbitration; waive their rights under the Servicemembers’ Civil Relief Act; provide a payroll allotment as a condition of obtaining credit; be able to refinance a payday loan; or be able to secure credit using a post-dated check, access to a bank account (other than at an interest rate of less than 36% MAPR), or a car title (except with a bank, savings association, or credit union).
As expected, the final rule continues to require lenders to determine whether an applicant is a covered borrower. A welcome change from the proposed rule, however, is that the final rule adds an additional safe harbor to “legally conclusively determine” whether a potential borrower is a covered borrower. Under the proposed rule, the only safe harbor that would have been available would have required lenders to use the Department of Defense’s online database to a borrower’s military status. Various stakeholders in the industry had expressed concern that the database is frequently unavailable, which would have slowed down the credit application process. The final rule includes both the proposed safe harbor for using the Department of Defense’s database and a new safe harbor for lenders who use a consumer report from a nationwide consumer reporting agency to confirm a potential borrower is not a covered borrower.
Effective Date and Compliance Dates
The new rule will become effective October 1st, 2015, but will have staggered compliance dates. In response to a request from the American Bankers Association, banks and credit unions have generally been granted an extension until October 3, 2016 to become compliant. Open-ended credit accounts, such as credit cards, are exempt from the rule until October 3, 2017.
Penalties and Non-Compliance
The new rule will be enforced by the Consumer Financial Protection Bureau and the Federal Trade Commission, based on which regulator has Truth in Lending Act enforcement authority over the lender. Knowing violations of the MLA and the new rule constitute misdemeanors. The rule also authorizes damages in private causes of action of not less than $500 per violation, plus punitive damages and attorneys’ fees.
Banks and other financial institutions will want to review their loan products to determine whether they are covered by the new rule. Any loan agreement that violates the MLA is void from inception, so if a loan product is covered, the financial institution will need to implement policies and procedures for accurately calculating the MAPR. If a product’s MAPR will exceed 36%, the financial institution will also need to implement policies and procedures to verify the loan applicant’s military status, preferably using one of the two methods that provide a safe harbor.