With the July 2015 amendments to the Military Lending Act (MLA) set to take effect on October 3, the Department of Defense (DoD) published an interpretive rule to help financial institutions achieve compliance with the changes.
Enacted in 2006, the MLA caps the interest rate on covered loans to active duty servicemembers at 36 percent (referred to as the Military Annual Percentage Rate (MAPR)), requires disclosures to inform servicemembers of their rights, and prohibits the use of arbitration clauses in contracts with servicemembers.
The law also provided the 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. The Department more recently determined that a far broader scope of coverage was necessary and amended its MLA implementing regulations just last year. See here, extending the MAPR, ban on mandatory arbitration, and other limitations to a larger range of credit products for military servicemembers and their families.
With the effective date of the changes in sight, the DoD has followed up with an interpretive rule in a Q-and-A format intended to address ambiguities in the amendments. “This interpretive rule does not substantively change the regulation implementing the MLA, but rather merely states the Department’s preexisting interpretations of an existing regulation,” the agency explained.
For example, the DoD explains that, for open-end credit products where the MAPR will vary each billing cycle, a creditor can comply with the 36 percent cap “by waiving fees or finance charges, either in whole or in part, in order to reduce the MAPR to 36 percent or below in a given billing cycle.” Fees that a creditor is required to pay by law and passes through to a covered borrower must be included in the MAPR calculation if they are a “finance charge” as defined by Regulation Z, the Department adds.
The MLA requires creditors to provide an oral disclosure of the payment obligation before or at the time the covered borrower becomes obligated or establishes an account. The interpretive rule makes clear that creditors have other options. For example, a creditor may orally provide “a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow,” the DoD says. For oral disclosures provided via toll-free telephone number, the disclosure only needs to be available for a period “reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.”
Providing some relief to creditors, the DoD explains that standard written credit agreements used for both covered and non-covered borrowers that contain prohibited terms for covered borrowers (mandatory arbitration, for example) are permissible “if the agreement includes a contractual ‘savings’ clause limiting the application of the proscribed item to only non-covered borrowers, consistent with any other applicable law.”
In addition, assignees are allowed to rely on the safe harbor granted to creditors that determined covered borrower status using the DoD database or a credit report.
The MLA amendments include a prohibition on the use of a check or other method of access to a deposit, savings, or other financial account maintained by a covered borrower. But this ban does not prevent covered borrowers from “tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor,” the Department says, or from authorizing recurring payments that comply with applicable laws like the Electronic Fund Transfer Act.
To read the DoD interpretive rule, click here.
Why it matters
If companies did not believe the MLA applied to them, they may wish to think again. The 2015 regulations dramatically broadened the potential coverage of the law, with the changes effective October 3, 2016, expanding coverage to almost all forms of consumer credit within the scope of the Truth in Lending Act. If those companies have not done so already, financial services providers should review the DoD’s guidance now (although credit card issuers were given an additional year, until October 3, 2017, to achieve compliance).