Lenders are just weeks away from the required Military Lending Act compliance date of Oct. 3, yet many are scrambling to find a solution. In fact, officials with CUNA and the American Bankers Association said they were still confused by the rules, and requested a six-month extension from the Department of Defense for compliance.
Card holders have until Oct. 3, 2017 to comply, but others are trying to navigate what the rule means and how to introduce new practices to protect and serve military credit consumers.
What are the top questions still circulating about this key piece of regulation?
Here are a few we’ve been tracking, along with some responses to assist with this shift in compliance.
1. What types of accounts are covered under the Military Lending Act (MLA)?
It initially applied to three narrowly-defined “consumer credit” products:
- Closed-end payday loans;
- Closed-end auto title loans; and
- Closed-end tax refund anticipation loans.
The new rule, issued in 2015 by the Department of Defense, expands the definition of “consumer credit” covered by the regulation to more closely align with the definition of credit in the Truth in Lending Act and Regulation Z. This means MLA now covers a wide range of credit transactions.
It does not apply to residential mortgages and credit secured by personal property, such as vehicle purchase loans.
2. Who are the covered borrowers under the MLA?
The DMDC database identifies individuals who meet one of the following criteria:
- Is on active duty
- 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 less, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 u.s.c. 101 (d)(6)
- The member’s spouse
- The member’s child defined in 38 USC 101(4), or
- An individual for whom the member provided more than one-half of the individual’s support for 180 days immediately preceding the extension of consumer credit covered by 32 C.F.R. Part 232
The flag returned from DMDC will not specifically identify the active duty military member, but it will flag if the applicant is a covered borrower.
3. How is MAPR calculated? What additional fees are included?
The MAPR includes interest, fees, credit service charges, credit renewal charges, credit insurance premiums and other fees for credit-related products sold in connection with the loan. You should work with your legal/compliance teams for MLA restrictions and applicability.
4. What is the difference between the Servicemembers Civil Relief Act (SCRA) and the Military Lending Act (MLA)?
Both regulations are designed to protect U.S. service members and their families, but each focus on different areas. SCRA has been around for decades and was designed to temporarily suspend judicial and administrative proceedings and transactions that may adversely affect service members during their actual military service. In fact, if a service member has a debt before he or she joined the active military service, they can have the interest rate reduced to 6 percent, upon request. If the loan is a mortgage, that rate can also be reduced for the duration the member is in the military, plus one year. Other loans are only reduced for the duration the member is on active duty.
MLA, on the other hand, is focused solely on providing specific protections for active duty service members and their dependents in certain consumer credit transactions. It was introduced in 2007, but strengthened in 2015. Specifically, it limits APR to 36 percent on covered products, which was recently expanded to include closed-end payday loans, closed-end auto title loans and closed-end tax refund anticipation loans. Unlike SCRA, where the responsibility to activate these protections falls on the service member, MLA requires creditors to verify active duty status and dependents at origination.
5. Explain the difference between accessing MLA status directly versus indirectly.
The Final Rule permits a creditor to use information obtained directly from the Department of Defense’s Database. Information can also be obtained from a nationwide consumer reporting agency to determine whether a consumer applicant is a covered borrower. When working with Experian, the one-stop solution will entail outputting the MLA indicator on the credit report at point of origination. We anticipate this solution will be available in fall 2016.
Not much is known about what the punishments or fines will look like for infractions, but now is the time to start reviewing business governance and procedures that support compliance. To learn more about MLA and to access an on-demand webinar with industry experts, visit our site.