On July 21, 2015, the Department of Defense (DOD) amended its regulation implementing the Military Lending Act (MLA) that, among other protections, limits the amount of interest a creditor may charge a military service member on certain products to a maximum military annual percentage rate (MAPR) of 36 percent (the Final Rule). Among other changes, the Final Rule extends protections to a broader range of closed-end and open-end products, modifies the "covered borrower" assessment methods used by creditors, and modifies creditors' disclosure obligations.
In drafting the Final Rule, the DOD consulted with the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (CFPB), the Department of Treasury, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, the Agencies), and will continue to consult with the Agencies during the implementation of the Final Rule. The following are the most significant changes in the Final Rule:
- New Consumer Credit Products. The DOD revised the term "consumer credit" so the Final Rule consistently covers consumer credit products under the Truth in Lending Act, as implemented by Regulation Z. Whereas the existing MLA rule only covered payday loans, vehicle title loans, and tax refund anticipation loans, the Final Rule expands coverage to installment loans, unsecured open-end lines of credit, and credit cards. Certain credit products, however, are exempted under the Final Rule, including residential mortgages and any motor vehicle loan that is secured by the vehicle being purchased.
- Assessment of Covered Borrower. The Final Rule includes a modified safe harbor provision permitting creditors to conclusively assess whether a consumer is a covered borrower - and, thus, subject to the protections of the MLA - by using information obtained directly or indirectly from the MLA Database or in a consumer report from a nationwide consumer reporting agency. Such qualifying determination would be considered conclusive as long as creditors timely create and maintain records of the information obtained.
- Disclosure Obligations. In an attempt to streamline the disclosures provided to a borrower, the DOD modified the mandatory loan disclosure provisions of the rule. The modifications include: eliminating the requirement that the information be provided clearly and conspicuously; requiring a creditor to provide a statement of the MAPR that describes the charges the creditor may impose, rather than a periodic rate of the MAPR itself; allowing a creditor to orally provide the disclosures; and eliminating the requirement that the creditor provide a specific statement regarding protections available under federal law. The Final Rule now requires three categories of disclosures: (1) a statement of the MAPR applicable to the extension of consumer credit; (2) any disclosure required by Regulation Z; and (3) a clear description of the payment obligation of the covered borrower.
The Final Rule becomes effective on October 1, 2015, and creditors must comply with its requirements for any covered transaction consummated or established on or after October 3, 2016. Creditors may continue to avail themselves of the current safe harbor relating to the identification of a covered borrower under existing section 232.5(a) until October 1, 2016. Finally, creditors will have an additional year to prepare for compliance with the Final Rule as it relates to credit card accounts (until October 3, 2017).
The DOD’s Final Rule is the latest government action affording additional consumer protections to military service members and their families. On July 6, the New York Department of Financial Services (the DFS) reversed a 10-year-old administrative determination allowing companies to make unlicensed loans that were in some cases more than double New York’s interest rate limits to service members who were stationed in New York, but were not permanent New York residents. In order to close what the DFS referred to as the “Fort Drum Loophole,” the DFS changed its policy and now requires creditors to comply with New York usury and licensed lender laws when extending credit to service members, irrespective of the permanent residency of the borrower. In connection with the DFS’ policy change, New York Governor Andrew Cuomo stated that “companies should know that we will not hesitate to crack down on bad actors.” Similarly, in connection with the DOD’s Final Rule, CFPB Director Richard Cordray stated, “[a]s one of the agencies responsible for enforcing the Military Lending Act, we stand ready to stop illegal lending to military families.”
These comments from top regulatory officials, combined with new policies and rules relating to extensions of credit to military service members and their families, underscore the importance of strict compliance. Importantly, the Final Rule retained the enforcement provisions of the existing MLA rule and provides that the requirements of the Final Rule may be enforced by the CFPB and other appropriate agencies. Given the regulatory attention on this niche area of lending and Agencies’ history of publicizing enforcement activity in this area, creditors extending credit to service members should closely review recent industry developments and implement any necessary changes to their lending practices.