In December 2017, the U.S. Department of Defense (“DoD”) issued updated interpretive guidance on the Military Lending Act (“MLA”), and President Trump signed into law the extension of certain protections provided to servicemembers through the Servicemembers Civil Relief Act (“SCRA”). Despite a change in leadership at the Consumer Financial Protection Bureau (“CFPB”), Department of Justice (“DOJ”), and elsewhere, these updates demonstrate regulators’ continued interest in and focus on military lending. Against this background, those who lend to servicemembers will want to ensure that they are in compliance with both the MLA and SCRA, as well as with applicable requirements under related state laws.
There are two principal federal military lending laws: SCRA and the MLA. SCRA contains a number of requirements designed to aid servicemembers during and after their period of military service. Among other things, SCRA caps interest at 6 percent on loans obtained prior to a servicemember entering active duty and protects a covered servicemember against the foreclosure, sale, or seizure of his or her home during military service and for a certain period thereafter.1 Many states have enacted similar laws.
The MLA contains many similar requirements and applies solely to consumer credit. Congress passed the MLA in 2007 in light of DoD’s finding that “financial readiness [is equated] with mission readiness” and its concerns about “the debt trap some forms of credit can present for Service members and their families.”2 Among other things, the MLA prohibits lenders who provide consumer credit to covered servicemembers from charging a military annual percentage rate (“MAPR”) of interest (as calculated under applicable regulations) in excess of 36 percent.3 It also contains certain disclosure requirements and generally prohibits lenders from using arbitration clauses in servicemember loan agreements.4 While the MLA applies to a wide array of loan types, home mortgages and auto-secured purchase loans are explicitly excluded.5
Updates to Military Lending Laws
On December 12, 2017, President Trump signed into law legislation passed by Congress that extends protections within SCRA against the sale, foreclosure or seizure of a servicemember’s home within one year of a servicemember’s return from active duty until January 1, 2020.6 There is a long history of Congress providing similar extensions for this provision of SCRA. Absent this extension, these foreclosure protections would have expired at the end of 2017.
On December 14, 2017, DoD published an amendment to its August 26, 2016 interpretive rule related to the MLA.7 The original interpretive rule provided question and answer style guidance on various questions received by DoD with regard to its July 2015 MLA final rule.8 DoD’s December 2017 amendment took effect upon issuance and contains four updated questions and answers, two of which discuss lenders’ ability to obtain a security interest in a borrower’s financial accounts and are closely related:
i. Exemption for credit secured by a motor vehicle or personal property where credit is provided in excess of the purchase price of the security
The first question and answer examines whether credit provided in excess of the cost of an automobile or personal property that secures the credit qualifies for an exemption from the definition of “consumer credit,” therefore exempting a lender from MLA requirements. DoD stated that “generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will [do so].” DoD also stated that “credit transaction[s] used to finance the object itself, as well as any costs expressly related to that object, [are] covered by the exceptions” in the MLA.
For example, a credit transaction used to purchase both an appliance and delivery of that appliance is exempted from MLA requirements. However, those same transactions would not fall into the MLA exception where credit from the transaction is used to simultaneously purchase a credit insurance premium.9
ii. Borrowers’ ability to grant, and lenders’ ability to take, security interests in covered borrowers’ accounts
The interpretation notes that covered borrowers may grant security interests to creditors in their checking, savings, or other financial accounts so long as granting such an interest is not otherwise prohibited by applicable laws and the creditor complies with other provisions of the MLA. The MLA does not preempt state laws, but it does prohibit a creditor from using a borrower’s account information to develop a remotely created check or payment order in order to collect payments on consumer credit from a covered borrower.10
Creditors may obtain statutory liens on funds deposited within covered borrowers’ asset accounts through certain federal or state laws. The MLA does not prohibit creditors from exercising their rights under such laws, but creditors must comply with applicable MLA requirements when they take such positions.11
iii. Safe harbor qualification
The MLA establishes a safe harbor method through which lenders can comply with rules that require them to assess whether a consumer is covered by the MLA.12 A creditor qualifies for that safe harbor when it performs a qualified covered borrower check at the time the covered consumer initiates a credit transaction or applies to establish an account or up to thirty (30) days prior to the action taken by the consumer. Creditors can also become qualified for the safe harbor when they conduct a qualified covered borrower check “simultaneously with the initiation of the transaction or submission of an application by the consumer or during the course of the creditor’s processing of that application for consumer credit.”13
The MLA amendments and the extension of SCRA protections demonstrate the potential for renewed regulatory focus on military lending. They also heighten the importance of maintaining robust compliance management and regulatory change management policies, procedures, and practices. Financial institutions should ensure that appropriate personnel are aware of these updates.