The Department of Defense (DOD) recently finalized amendments to its Military Lending Act (MLA) regulations that impose new compliance obligations on a wide variety of creditors, including issuers of credit cards and installment loans. The rule generally requires creditors to determine whether a consumer credit applicant is a member of the military, or dependent of a member of the military (a “covered borrower”), and impacts the pricing and terms of nearly all credit products issued to covered borrowers.
Background. The MLA became law in 2007, and the DOD issued implementing rules that same year, but they were narrowly crafted to only govern payday loans, tax refund anticipation loans, and vehicle title loans issued to covered borrowers.
Revised rules govern most consumer credit issued to covered borrowers. The revised regulations significantly broaden the scope of the MLA by applying its provisions to all consumer credit issued to covered borrowers, including credit cards, though mortgages and loans secured by personal property, such as auto loans, are excluded. Below are questions and answers regarding the rule as revised.
- How can creditors determine if the MLA applies to a consumer credit contract? Under the current MLA regulations, creditors may ask an applicant if she is a member of the armed forces (or a dependent) and rely on her answer when determining if the MLA rules apply. Under the revised rules, creditors can “apply [their] own method to assess whether a consumer is a covered borrower,” including by continuing to ask an applicant to state her military status. However, such evidence is not deemed “legally conclusive.”
The revised rule provides a safe harbor that allows creditors to “conclusively determine” if a consumer is a covered borrower. The safe harbor applies if a creditor checks an applicant’s military status through the DOD’s MLA database or a consumer report from a national credit reporting agency.
- Does the MAPR cap pricing? Yes, the MAPR on all consumer credit products sold to covered borrowers is capped at 36%.
- How is the MAPR calculated? The MAPR is calculated like the APR under Regulation Z but also includes charges for: i) credit insurance, debt cancellation, or debt suspension; ii) credit-related ancillary products sold in connection with a closed-end credit transaction; iii) the periodic rate; iv) finance charges beyond the periodic rate; v) application fees; and vi) participation fees.
Exceptions apply for participation fees that are $100 or less per year and credit card account fees that are “bona fide” and reasonable. Credit card fees are bona fide and reasonable if they are “less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by 5 or more” large creditors during the three prior years.
- Does the MAPR have to be monitored regularly? For closed-end loans, the MAPR can be calculated once at the time of origination. But for open-end loans with fees or charges that vary over time, compliance with the MAPR cap must be evaluated each billing cycle.
- What disclosures are required? Covered borrowers must be given a disclosure describing the 36% MAPR cap in writing and orally. A 110-word model disclosure is provided.
- What contract terms are prohibited? Credit agreements with covered borrowers cannot mandate arbitration, require unreasonable notice as a condition of legal action, or charge a prepayment penalty, among other things.
Compliance dates and enforcement. The revised MLA regulations become effective October 1, 2015, though mandatory compliance is delayed until October 3, 2016, generally and until October 3, 2017, for credit cards.
The MLA regulations are enforced in the same manner as Regulation Z. Accordingly, the Consumer Financial Protection Bureau will be the primary regulator examining compliance with these rules by large banks and non-banks. Credit agreements that are not originated in compliance with the MLA regulations are void. Finally, a private right of action exists and allows for a $500 fine per violation, plus actual and punitive damages.