On July 22, 2015, the Department of Defense (DOD) issued its final rule implementing the Military Lending Act (MLA). Enacted in 2006, the MLA seeks to protect active-duty military members and their dependents from predatory lending in high-cost consumer credit transactions. The DOD exercises rule-making authority to delineate which types of transactions are covered by the law.Important provisions for lenders to note include:
36% cap on interest and fees. The MLA limits the annual interest rate on covered loans to 36 percent. Known as the Military Annual Percentage Rate (MAPR), this cap includes all interest and fees associated with a loan, including credit default insurance and debt suspension plans. This definition of MAPR is broader than the APR calculation required by the Truth in Lending Act (TILA) or Regulation Z.
Prohibited terms. The final rule prohibits lenders from requiring active-duty military members in covered consumer credit transactions to waive their rights under the Servicemembers Civil Relief Act (SCRA) for products covered by TILA, to submit to mandatory arbitration if a dispute occurs, to provide a payroll allotment as a condition of obtaining credit, to refinance a payday loan, or to provide a lender access to a bank account or car title as a condition of certain loans.
Covered consumer credit transactions. The final rule defines “consumer credit” to include most loans offered to military borrowers for personal, family, or household purposes and which are subject to a finance charge or payable in over four installments. This definition includes installment loans, deposit advance loans, unsecured open end lines of credit, payday loans, vehicle title loans, tax refund anticipation loans, and credit cards. However, the MLA excludes loans secured by real estate or loans used to finance the purchase of a vehicle.
Covered borrowers. Lenders must take steps to accurately determine whether a potential borrower is covered by the MLA. The Defense Manpower Data Center provides certificates of current active duty service at https://www.dmdc.osd.mil/appj/scra/. The final rule also affords safe harbor to lenders who rely on a consumer report from a nation-wide consumer reporting agency to confirm the military status of prospective borrowers.
TILA disclosures. Lenders dealing with military members in covered consumer transactions must provide TILA disclosures.
Implementation period. The final rule takes effect on October 1, 2015 and applies to covered consumer credit transactions or accounts created after October 3, 2016. Open-ended accounts and credit card are exempt from the final rule until October 2, 2017.
Penalties and compliance. Any loan that violates the MLA is void from inception. Knowing violations of the MLA constitute misdemeanors. In addition, the MLA authorizes lawsuits seeking damages of not less than $500 per violation plus punitive damages and reasonable attorneys’ fees.
Lenders should review their financial products to determine which ones may be affected by the MLA. Also, financial institutions should review their procedures to verify the military status of borrowers, to accurately calculate MAPR, and to ensure that prohibited terms are not embedded in loan agreements with military borrowers. Failure to verify compliance may result in voided transactions, reputation damage, and financial liability.
The final rule is available at http://www.gpo.gov/fdsys/pkg/FR-2015-07-22/pdf/2015-17480.pdf.
