On September 26, 2014, the Department of Defense (DoD) announced proposed changes to its regulation implementing the Military Lending Act (MLA). The MLA, passed by Congress in 2006, provides active duty service members and their dependents with certain protections in a limited number of consumer credit transactions. The MLA, among other things, caps interest rates for covered loans at 36%, requires lenders to provide disclosures informing service members of their rights under the MLA, and prohibits mandatory arbitration in the event of a dispute. The MLA is implemented by the DoD and enforced by federal regulators, including the Consumer Financial Protection Bureau (CFPB).
This is the latest in a series of actions by federal regulators and others to eliminate predatory lending practices targeting members of the military and their families. In September 2013, the CFPB released guidelines on how its examiners will identify consumer harm and risks related to MLA violations when supervising payday lenders. In November 2013, the CFPB took action against Cash America, a payday lender, for extending payday loans to service members and their families in violation of the MLA.
The MLA currently applies to (1) closed-end payday loans of less than $2,000 with a maximum term of 91 days; (2) closed-end motor vehicle title loans with a maximum term of 181 days; and (3) closed-end tax refund anticipation loans. A creditor extending any such covered loan may not impose a Military Annual Percentage Rate (MAPR) greater than 36% to a covered borrower (“interest-rate limit”). Second, a creditor must satisfy certain other terms and conditions in connection with an extension of any covered consumer credit transaction, such as the requirement to disclose certain information, both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account and the prohibitions against mandatory arbitration and the assessment of prepayment penalty fees.
In response to the restrictions under the MLA, some lenders modified their loan products to fall outside the scope of the MLA and continued to market and provide high-rate loans to service members. For example, a payday lender may avoid the 36% interest-rate limit under the MLA by simply adjusting the terms or conditions so the loan is either (1) not closed-end credit, (2) extended for a term longer than 91 days, or (3) extended for an amount in excess of $2,000. These simple changes allowed payday lenders to continue to provide high rate credit products targeted to service members that avoided the protections of the MLA.
In an effort to limit these product changes and increase the protections under the MLA, the DoD proposal expands the definition of “consumer credit” to the broader definition used in the Truth in Lending Act—credit offered or extended to a covered borrower primarily for personal, family, or household purposes and that is (1) subject to a finance charge or (2) payable by a written agreement in more than four installments. Additionally, any charge considered a “finance charge” under Regulation Z, as well as certain other charges covered as “interest” under the MLA, would be included in the calculation of the MAPR. All forms of payday loans, motor vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards would become subject to the protections under the MLA, including the interest-rate limit. Loans secured by real estate and purchase-money loans, including loans to purchase a motor vehicle, would continue to be excluded from coverage under the MLA.
The proposal would also allow lenders to determine whether borrowers are covered under the MLA by checking their status in the existing publicly available online DoD database. Lenders who used the database to confirm the eligibility of borrowers would receive a safe harbor from liability under the MLA.
The proposed regulation was published in the Federal Register on Monday, September 29, 2014. Comments are due to the DoD no later than November 28, 2014.