The Military Lending Act (MLA), along with the Servicemember’s Civil Relief Act (SCRA), provides protections to our servicemembers. Both of these Acts were developed to help ease the legal and financial burdens on servicemembers actively serving our country and allow them to focus on their duties.
The MLA came as result of the Talent-Nelson Amendment to the John Warner Defense Authorization Act of 2007, to provide landmark federal protections against predatory lending for active duty servicemembers and their eligible family members. This year, the Department of Defense increased the scope of the MLA that expands the protections to a broader range of both open- and closed-end credit.
The final rule broadens the MLA protections by expanding the range of covered loans, defining a covered borrower, adding more components to the MAPR, placing restrictions on imposing other limitations, and requiring a statement of the MAPR disclosure.
Credit unions should review each of these topics to determine the extent of the impact on their operations.
Range of Covered Loans
First, the final rule provides protections to a broader range of both open- and closed- end credit. The final rule applies to “consumer credit”, defined as “credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is subject to a finance charge and payable in more than four installments.” A wide range of credit transactions, including open-end credit and installment loans will be covered by the Act.
Exceptions: The requirements will not apply to:
- residential mortgages, including construction, refinancing, home equity loans or lines of credit, or reverse mortgages;
- credit to finance the purchase of a motor vehicle or other personal property, and secured by the vehicle or other personal property being purchased;
- “own title” loans issued by banks, savings associations, or credit unions; and
- any credit not subject to the Truth-in-Lending disclosure requirements.
The list of covered loans now includes certain installment loans, lines of credit, and credit cards. While the limited coverage provided currently may not have much impact on the credit union, the inclusion of these additional types of loans will increase the credit union’s exposure to the requirements.
Covered Borrower
Secondly, the rule defines a “covered borrower” as a consumer who, at the time they become obligated on a consumer credit transaction or establish an account for consumer credit, is a member of the armed forces who is serving on active duty, or active guard and reserve duty, along with their dependents. (Generally, protections from the MLA apply to loans taken out while on active duty, and the from the SCRA apply to loans taken before entering active duty.)
Credit unions can continue to use the current “covered borrower identification statement” until the Act’s effective date. After October 3, 2016, in order to qualify for the covered borrower identification safe harbor provided in the final rule, credit unions may use either of the two methods for conducting a covered-borrower check. Credit unions can either check the member’s duty status on the Department of Defenses’ website, or use information on a credit report from a nationwide consumer reporting agency to achieve safe harbor. At this time, it is unknown how the information will be presented on a credit report.
Verification needs to be completed before, but within 30 days, of consummation of the loan or account.
Credit unions should be able to determine whether an applicant is a covered borrower, and retain a record of the verification. This may be especially applicable to military members who are not covered borrowers, in the event of any future claims of mistreatment.
MAPR Components and Calculation
Next, the rule requires that credit rates do not exceed the MAPR of 36 percent for closed-end credit or in any billing cycle in open-end credit. The calculation for the MAPR for closed-end loans follows Regulation Z’s APR calculation including the following fees. Open-end credit follows Regulation Z’s rules for calculating the effective APR for a billing cycle including the following fees.
The fees included in the calculation of the MAPR are:
- any credit insurance premium or fee,
- any fee for a debt cancellation contract,
- any fee for a debt suspension agreement,
- any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit, and
- except for bona fide fees:
- finance charges associated with the consumer credit,
- any application fee other than a fee charged by an insured depository institution for short-term, small amount loans, provided that the application fee is charged to the covered borrower not more than one in any 12-month rolling period, and
- any fees imposed for participation in any plan or arrangement for consumer credit.
Bona fide fees charged to a credit card account, other than a periodic rate, do not need to be included in the MAPR as long as the fee is reasonable. The rule provides a safe harbor when the fee is less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by 5 or more creditors each of whose U.S. credit cards in for is at least $3 billion in an outstanding balance.
If the credit union charges any fee that is a non bona fide fee and imposes a finance charge to the covered borrower, the total amount of those fees, including bona fide fees, and other finance charges shall be included in the MAPR. The rule provides an example of this:
In a credit card account under an open-end (not home-secured) consumer credit plan during a given billing cycle, Creditor A imposes on a covered borrower a fee for a debt cancellation product, a finance charge, and a bona fide foreign transaction fee that qualifies for the exclusion. Only the fee for the debt cancellation product and the finance charge must be included when calculating the MAPR.
In a credit card account under an open-end (not home-secured) consumer credit plan during a given billing cycle, Creditor B imposes on a covered borrower a fee for a debt cancellation product, a finance charge, a bona fide foreign transaction fee that qualifies for the exclusion, and a bona fide but unreasonable cash advance fee. All of the fees—including the foreign transaction fee that otherwise would qualify for the exclusion—and the finance charge must be included when calculating the MAPR.
Credit unions will need to be able to calculate the MAPR on covered loans.
Other Limitations
The final rule also prohibits other requirements that may be imposed on a credit transaction. These include requiring the servicemember to:
- waive the right to legal recourse,
- submit to arbitration or other onerous legal notice requirements in the case of a dispute,
- require unreasonable notice as a condition for legal action,
- require an allotment be established for repayment, or
- impose prepayment restrictions or penalties.
Credit unions should review their agreements, policies and procedures to make sure that these limitations are not included for covered loans.
Disclosures
Finally, the rule requires the credit union to provide a statement of the MAPR. At or before the time a covered borrower becomes obligated or opens an account, the credit union must provide a statement of the MAPR applicable to the credit extension. The statement describes the charges the credit union may impose relating to the calculation of the MAPR, rather than a numerical representation of the MAPR. The rule provides a model statement:
Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).
The final rule no longer requires disclosing of the MAPR as an annual percentage rate or a total dollar amount as is currently required.
Credit unions will need to identify and provide the statement of the MAPR to covered borrowers.
Compliance/Effective Dates
The new requirements will go into effect on October 3, 2016 with the exception of credit card accounts. The requirements will apply to credit cards on October 3, 2017. Any credit consummated or established for servicemembers after these dates will need to abide by the requirements.
[i] The covered borrower identification statement is:
Federal Law provides important protections to active duty members of the Armed Forces and their dependents. To ensure that these protections are provided to eligible applicants, we require you to sign one of the following statements as applicable:
___ I AM a regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer.
___ I AM a dependent of a member of the Armed Forces on active duty as described above, because I am the member’s spouse, the member’s child under the age of eighteen years old, or I am an individual for whom the member provided more than one-half of my financial support for 180 days preceding today’s date.
–OR—
I AM NOT a regular or reserve member of the Arm, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer (or a dependent of such a member).
Warning: It is important to fill out this form accurately. Knowingly making a false statement on a credit application is a crime.
