We first posted an article about proposed amendments to the Military Lending Act (MLA) on December 30, 2014. Ultimately, the Department of Defense (DoD) amended its regulation effective October 1, 2015, and extended the MLA’s application to a wide range of closed-end and open-end credit products and to broad classes of creditors as originally proposed. With the implementation of the final rule, the MLA now essentially uses the definition of “consumer credit” as defined in the Truth in Lending Act. Compliance with the amended MLA is required by October 3, 2016. However compliance with the rules for credit cards in the MLA is delayed until October 3, 2017.
The final regulation applies to “creditors,” which is broadly defined as “banks, credit unions, savings associations, finance companies and other lenders, as well as any assignee of a creditor.” Although many bank and credit unions attempted to argue for an exemption from the regulation on the grounds that they are already highly regulated, the DoD declined to exempt credit unions and banks from the rules.
The final rule also defines “consumer credit” in broad terms to cover all “credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.” As defined, the final rules applies to both closed-end and open-end credit, including installment loans, boat loans, single payment loans, lines of credit, credit cards, pay-day loans, and other consumer credit transactions. This means that only residential mortgage loans, secured motor vehicles, personal property loans and other transactions not covered by Regulation Z are not covered by the MLA. Unlike the Servicemembers Civil Relief Act, the MLA does not apply to business purpose loans.
Who is a Covered Borrower?
The DoD seeks to protect all “covered borrowers” which is defined as a consumer who, at the time he or she is obligated on a credit transaction, is a service member who is on “active duty” or a spouse or dependent of such person. As we blogged previously, the determination of who is a “covered borrower” is more complex as a result of the new rule. Under the old rules, creditors were permitted to rely on borrowers providing a self-certification as to whether they were a covered borrower.
This self-identification process, however, was believed to be misused in the industry and in the original proposed Military Lending Act rule, the DoD proposed a different process. Instead of self-identification, a creditor would have a self-harbor from liability only if it checked the borrower’s status against the MLA database.
Changing the Safe Harbor Rules
The DoD provides a 12-month period for a creditor to adjust its operations and loan products to comply with the rules. Until October 3, 2016, a creditor is permitted to continue using the existing safe harbor when assessing whether a consumer applicant is a covered borrower. However, this is subject to interpretation by the DoD which will prevent a creditor from using a borrower’s certification to allow the borrower to waive his or her rights to the protections provided under the MLA.
If a creditor desires a “legally conclusive mechanism” to determine whether a consumer seeking to obtain consumer credit is a “covered borrower”, the creditor is required to use one or both of the methods set forth in §232.5(b), and maintain a record of the information so obtained, as set forth in §232.5(b)(3). In several comments to the rules, commentators decried the DOD’s database as slow, unreliable and difficult to access. In response, the final rule allows a creditor to use information relating to a consumer contained in a consumer report obtained from a nationwide consumer reporting agency, or a reseller of such a consumer report. The DOD stated that it is willing to provide another avenue (other than the DOD database) to verify whether someone is a “covered borrower” because the Fair Credit Reporting Act (FCRA) imposes stringent requirements on the assembly of information for, disclosure of, and use of a consumer report. However, under current interpretations, the DOD will only accept certain nationwide consumer reporting agencies or nationwide resellers of such reports. Given the variety of data companies that qualify as “consumer reporting agencies”, this has the potential to expand as time goes on and the regulators become more comfortable with the reliability of the reports.
Heightened Operational Risk
The MLA provides that a creditor may not impose a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of “consumer credit” to a covered borrower. For closed end loans, the MAPR is a one-time calculation made prior to/at the time the loan is made. For open-ended credit transactions, the MAPR must be calculated for each billing cycle to determine whether a creditor is within the 36 percent MAPR. In addition, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing 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.
What may be the most challenging provision arises from the lack of clarity as to what fees must be included in the MAPR. The MAPR calculation includes any credit insurance premiums, fees for debt cancellation or debt suspension agreements, as well as fees for credit-related ancillary products. The MAPR calculation must also include any application fee and any finance charges associated with consumer credit. Although certain fees/premiums are voluntary and may be excluded from the finance charge definition under Regulation Z, under the MLA, these amounts must be included. The only fees that can be excluded are certain “bona fide” fees. In addition federal credit unions and other insured depository institutions are permitted a narrow exemption to exclude an application fee associated with certain short-term, short dollar loans from the MAPR calculation under certain circumstances.
The DOD believes that the final regulation streamlines the disclosure information that a creditor must provide to a covered borrower. There are 3 types of disclosures that must be provided. First, the creditor must provide a MAPR statement. This statement requires disclosures of the fees that are included in the calculation of the MAPR and other information required by the regulation. Second, the final rule requires creditors to provide Regulation Z disclosures, as applicable. Finally, creditors must describe the payment obligation of the consumer. The rule permits Regulation Z payment disclosures to be provided in satisfaction of this obligation.
The MLA also prohibits a creditor from refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit, and refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit. Any credit agreement that fails to comply with the MLA or which contains a provision that is prohibited by the MLA is “void from inception” of the contract.
Enforcement and a Private Right of Action
The final rule permits “agencies specified in section 108 of the Truth in Lending Act” to enforce the requirements of the MLA. This means the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the CFPB would share enforcement authority of the MLA over those it already supervises. The DoD is also required to consult “not less often than once every 2 years” with the “federal agencies” with a view towards revising the regulations implementing the MLA. Given the CFPB’s heavy involvement with the amendments to the MLA, we can expect that the CFPB would continue their focus on military affairs going forward.
The final rule also adds civil liability provisions that allow private lawsuits for MLA violations. Given the significant regulatory and civil liability risks associated with the MLA, banks, credit unions and non-financial institutions should examine their practices to ensure compliance with the MLA.