Creditors will soon need to comply with the greatly expanded Military Lending Act (MLA) requirements, implemented through the Department of Defense's (DoD's) regulatory overhaul. Interpretive guidance from the DoD, issued in late August, clarifies some of the open questions regarding the DoD's revisions of its regulations. DoD's guidance was released as industry participants finalize efforts to meet the new MLA requirements by the October 3, 2016 deadline (compliance with the rules for credit cards is currently delayed until October 3, 2017).
In July 2015, the DoD amended its regulation implementing the MLA and extended the statute to a broader range of closed-end and open-end credit products. The July 2015 final rule also modified provisions relating to the optional mechanisms a creditor may use when assessing whether a consumer is a covered borrower, modified the disclosures a creditor must provide, and implemented the enforcement provisions of the MLA. The DoD consulted with the CFPB in developing the final rule, and the CFPB actively supported the DoD's plans to expand MLA coverage. The CFPB has authority to enforce the MLA against lenders for whom it has enforcement authority under the federal Truth in Lending Act (TILA) and can examine lenders for whom it has supervisory authority for MLA compliance.
Key changes under the revised regulation include a broader definition of "consumer credit." The MLA requires that the "military annual percentage rate" (MAPR) charged by a creditor be capped at a maximum of 36%. Furthermore, in addition to interest and fees, the MAPR includes charges for most ancillary "add-on" products, such as credit default insurance and debt suspension plans. Creditors are required to screen all applicants for military status and can no longer rely on application provisions that ask applicants whether to disclose their military status or that of a spouse/dependent. The MLA mandates certain notices and disclosures and provides for other protections on "consumer credit" extended to service members and their families.
DoD Guidance Recap
The interpretive guidance addresses several compliance details that were not addressed, or were left unclear, in the updated MLA rule. While the core of the MLA rule remains the same, industry participants can use the DoD's guidance to clear up gray areas in their compliance systems and potentially reduce compliance burdens caused by ambiguity. Important clarifications include, among others:
- The types of products included within the definition of "consumer credit": The MLA regulation relies heavily on definitions from the TILA, and defines "consumer credit" generally as credit offered or extended to a covered borrower primarily for personal, family, or household purposes that is either subject to a finance charge or payable by a written agreement in more than four installments. Exceptions to this general definition include residential mortgage transactions; purchase money credit for a vehicle or personal property that is secured by the purchased vehicle or personal property; certain transactions exempt from Regulation Z, which implements TILA; and credit extended to non-covered borrowers. The interpretive guidance clarifies that the purchase money exception is limited to a loan that finances "only the acquisition of personal property" and does not apply to a "credit transaction that provides purchase money secured financing of personal property with additional 'cash out' financing." The guidance also states that overdraft products should be analyzed under each element of the definition of "consumer credit" and are not amenable to a bright line rule.
- Oral provision of the payment obligation disclosure may be generalized: The MLA rule requires a creditor to provide a covered borrower with a clear description of the payment obligation by the time the covered borrower becomes obligated on the transaction or establishes an account. The description may be provided through "an oral recitation of the payment schedule or account-opening disclosure." Under the interpretive rule, 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" would satisfy this requirement, as long as that description is clear and accurate.
- Savings clauses may address prohibited terms. The MLA rule prohibits the use of certain contractual terms, including mandatory arbitration provisions. However, rather than mandating the creation of a new, MLA-specific loan agreement, the interpretive rule explains that a creditor can use a contractual savings clause to limit the application of prohibited terms in existing loan agreements to only non-covered borrowers.
- Safe harbor may extend to a creditor's assignees. The MLA rule provides a safe harbor for a creditor that determines a consumer's military status using the DoD database or a credit report. The interpretive rule explains that assignees that continue to maintain the military status record created by the initial creditor also fall within the safe harbor.
- Waivers may be used to achieve the 36% MAPR limit. The MLA includes a wide range of fees and charges in the MAPR. Since various fees and/or periodic charges could be triggered by the borrower and cause the MAPR to exceed 36%, the guidance clarifies that creditors may comply by waiving fees or finance charges to reduce the MAPR to 36% or below in a given billing cycle.
- Checks and other account access methods: The guidance addresses creditors' ability to accept payments by check and electronic fund transfer. The MLA rule prohibits a creditor from extending consumer credit to a covered borrower with respect to which the creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower. The interpretive rule clarifies that the MLA makes it unlawful for a creditor to use remotely created checks, remotely created payment orders, or post-dated checks to collect payments. It provides that the prohibition does not prevent a covered borrower from tendering a check or authorizing access to a deposit, savings, or other financial account (including Electronic Funds Transfer Act-compliant recurring transfers) to repay a creditor. The rule also clarifies that covered borrowers may grant a security interest to a creditor in the covered borrower's checking, savings, or other financial account.
While the DoD has rulemaking authority with regard to the MLA, under the regulation the CFPB is the primary enforcement agency. And the CFPB has clearly signaled that MLA compliance would be a key emphasis for the agency. In addition to investigations by Enforcement (often triggered by consumer complaints), the CFPB is likely to test for MLA compliance during examinations under its supervisory authority.
Creditors may also face enhanced scrutiny under the Servicemembers Civil Relief Act of 2003 (SCRA), which provides certain protections for active duty servicemembers. It remains to be seen how the enhanced compliance requirements under the MLA will affect SCRA obligations, but the CFPB will likely take an expansive approach to military lending, consistent with the government-wide focus on protecting servicemembers.