In 2006, Congress passed the Military Lending Act (MLA) to help protect active duty service members and their dependents from predatory lending. In 2015, the Department of Defense (DOD) issued a final rule amending the MLA to cover a wider range of credit products impacting traditional creditors like banks and credit unions. The DoD’s Final Rule expanded the scope of the MLA to include the majority of closed or open-ended loans, excluding all real estate secured transactions and certain purchase money auto or personal property transactions that don’t include funds in excess of the purchase of the goods secured.
Placing tighter restrictions on creditors lending to active military personnel, an amendment to the rule shifts the burden of proof of covered borrower status to the creditor. It used to be that the consumer would actually have to self-identify.
Lenders need to identify if the consumer is covered by MLA protections at the point of application but at a minimum, prior to origination in order to be extended the safe harbor and adjust contract and product terms to comply with MLA restrictions and limitations.
Last year, the MLA went into effect for most all products and services that are offered by traditional lenders like banks and savings and loans and credit unions, with the exception of credit cards. It covered overdraft protection lines, most all consumer purpose loans with two true exceptions. That’s the real estate secured transactions and then there’s a provision that excludes certain purchase money loans for things like auto vehicles or other personal finance items unless the loan includes additional cash for other things. For an auto, that could be a gap insurance policy.
What’s coming ahead for us with this October 3, 2017 is that credit cards will now be covered transactions as well. The same sort of limitations that apply to all the prior consumer purpose loans also will now apply to credit cards. That includes the 36% MAPR. The MAPR is calculated following the same methodology from Reg Z; however, it is different in that the MAPR includes many of the costs, fees, and charges that would be excluded from the finance charge under Reg Z APR. In order for fees to be excluded from the MAPR calculation, the regulation is very specific on how to determine when fees are “reasonable or bona fide” in order for them to be excluded.
The mandatory loan disclosures include a statement of the MAPR applicable to the credit transaction, which can be given just by describing the charges that may be imposed. A numeric disclosure is not required. The Truth in Lending disclosure must also be given, and then a clear description of the payment obligation. The account opening disclosures from Reg Z do satisfy this requirement. There’s a model disclosure in the final regulation as well. The oral disclosure can be given in person or a toll free number can be provided for phone applications.
The clear description of payment obligation can be done by generally describing how minimum payments are calculated and then refer the borrower to the Reg Z disclosures. Alternatively, a creditor could choose to describe the borrower’s obligation to make a monthly payment or some other time required under the agreement. A generic oral description of the payment obligation can be provided, even though the disclosure is the same for borrowers with a variety of different consumer credit transactions or accounts.
The “no roll-over loans” limitation is for creditors that offer deferred presentment transactions or similar payday loan transactions, but it does not include banks, savings associations, or credit unions. In addition, the MLA prohibits title pawn loans to covered borrowers, but this would not include a refinance of an auto loan by a bank, a savings association, or a credit union. The reference to no mandatory waivers of protection laws basically limit a creditor to require a covered borrower to waive the borrower’s right to legal recourse, to submit to binding arbitration in the case of a dispute, or give unreasonable notice as a condition for legal action. There also cannot be a prepayment penalty on a covered transaction.
A creditor cannot use a covered borrower’s account information to create remotely created checks or payments to collect payments. You also can’t use a postdated check which deprives the borrower of control over payment decisions. Creditors can use standard credit agreements for all covered transaction by creating a “savings clause” or a “carve-out” which limits the applicability of any prohibited terms to only non-covered borrowers or while the borrower is a covered borrower.
There are two ways to obtain Safe Harbor and get the covered borrower status, either directly from the Department of Defense Manpower Data Center (DMDC) or from a nationwide credit reporting agency or reseller that obtains it from the DMDC. Remember this is not only active duty service members – it’s also covered dependents. The first safe harbor is to use the DMDC directly. That can either be done by a one-by-one check through their website, or there is a batch process which takes about 24 hours for a turnaround time. In the future, there will be a direct connection to the DMDC MLA web services program, but it’s currently not available pending the DMDC’s implementation. The second source to be able to obtain active duty status for safe harbor for lenders can be from a nationwide credit reporting agency or reseller.