Why it matters

The Department of Defense (DoD) released its final rule amending the implementing regulations of the Military Lending Act (MLA), incorporating a broader range of credit products under its coverage and potentially implicating lenders outside the scope of loans to servicemembers. The DoD issued proposed regulations last year that expanded the scope of existing rules to cover more types of loans (such as payday loans, vehicle title loans, deposit advance loans, and credit cards) and prohibit binding arbitration. After a public comment period, the agency made some changes from the proposal, providing credit card issuers with an additional year to achieve compliance (until Oct. 3, 2017, while other creditors must be ready on Oct. 3, 2016), allowing credit unions and depository institutions some breathing room from an interest rate cap, and adding a second safe-harbor option for creditors to rely upon consumer reports. Although the rules are intended to provide consumer protections to servicemembers, consumer groups are likely to assert that all consumers should have similar protections, and all companies extending consumer credit would be well advised to familiarize themselves with the new regulations.

Detailed discussion

In 2006, the passage of the Military Lending Act (MLA) capped the interest rate on covered loans to active duty servicemembers at 36 percent (referred to as the Military Annual Percentage Rate (MAPR)), required disclosures to inform servicemembers of their rights, and prohibited the use of arbitration clauses in contracts with servicemembers.

The law also provided the Department of Defense (DoD) with the power to define the scope of credit covered by the statute. Initially, the agency used a narrow definition of credit that covered only three products: closed-end payday loans for no more than $2,000 and a term of 91 days or fewer; closed-end auto title loans with a term of 181 days or fewer; and closed-end tax refund anticipation loans.

But the agency felt that lenders were structuring products to evade the limits, and the agency therefore determined a broader scope of coverage was necessary, proposing amendments to its MLA implementing regulations last September.

Moving application of the MLA away from a product-by-product approach toward a more comprehensive alignment with credit products, the regs expanded the protections of the Act to additional financial services including payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards.

The MLA was also extended to active duty servicemembers and their families when seeking credit subject to the requirements of the Truth in Lending Act (TILA), with the exception of purchase-money loans and loans secured by real estate.

Other changes: the 36 percent MAPR now limits charges for most ancillary add-on products (such as credit insurance, debt suspension, and debt cancellation contracts), military borrowers receive additional disclosures, and creditors are prohibited from including an arbitration provision in contracts with servicemembers, requiring military borrowers to waive their rights under the Servicemembers Civil Relief Act (SCRA) for products covered by TILA, or providing a payroll allotment as a condition of obtaining credit.

After a public comment period, the DoD made some tweaks to the proposal.

Credit card issuers were granted a one-year reprieve to achieve compliance. The final rule takes effect on Oct. 1, 2015, applicable to consumer credit transactions or accounts consummated or established after Oct. 3, 2016, with a one-year extension until Oct. 3, 2017 for credit card issuers.

In addition, the Final Rule permits credit unions and insured depository institutions to exclude an application fee for short term, small-amount loans from the computation for the 36 percent MAPR cap under certain circumstances. And creditors now have a second safe harbor option to use a consumer credit report to determine if a consumer is a covered borrower (the proposed rule only featured a safe harbor for a determination based on information from the MLA database).

Enforcement of the regulations will be provided by the Consumer Financial Protection Bureau or the Federal Trade Commission. If an agreement is found to violate the MLA, it will be considered void from inception; knowing violations of the statute constitute a misdemeanor. A private right of action exists for plaintiffs to recover statutory damages of $500 per violation with the possibility of punitive damages and attorney's fees.

To read the DoD's Final Rule, click here.