Well, it’s been 2 month’s since the Military Lending Act took effect. If you’re institution hasn’t determined whether you’re ready and compliant yet, contact me because you’ve got some catching up to do. At least the credit card provisions haven’t kicked in yet, so if you offer credit cards you still have time for those.
It’s overdue then to give a brief overview of the act, including what I think are some helpful ways of identifying products that might fall under its umbrella.
One Sentence Summary
“A lending institution cannot impose a Military Annual Percentage Rate (MAPR) above 36 percent on any non-exempt consumer credit extended to a Covered Borrower.”
This is my one sentence summary that breaks down the big three elements that most institutions should be primarily focused on.
Non-Exempt Consumer Credit
Consumer credit must comply with MLA guidelines if: 1) it charges a finance charge (as defined under TILA), or 2) it is payable in installment payments of more than 4 installments, and 3) is not an exempt transaction.
Exempt transactions are:
- Those not covered under TILA (12 CFR § 1026.3) or state law;
- Purchase-money financing for vehicles;
- Purchase-money financing for personal property;
- Residential mortgage credit transactions, including purchases, refinances, construction loans, HELOCS, HE Loans, and reverse mortgages;
Technically the regulation mentions a fifth, which is any transaction not involving a covered borrower identified through the safe harbor method. But that logic is a bit too circular for me, so I consider the question of if a consumer is a covered borrower as its own separate step.
Cover Borrowers, Defined and Identified
A “covered borrower” under the MLA is a full-time active duty Service member (Armed Forces, Coast Guard, National Guard, and Reserve) who are under a call or order to serve for more than 30 days. It also includes the service member’s dependents, defined as a spouse, child under 21, parents or in-laws residing with and depending on the Service member for support, and unmarried people who the Service member has custody.
A covered borrower is only a covered borrower at the time of the transaction, and only remains a covered borrower during the service period.
Creditors are free to determine whether a consumer is a covered borrower however they wish. BUT there are two safe harbor methods of verifying a consumer’s status as a covered borrower:
- Through the Department of Defense’s database, located here: https://mla.dmdc.osd.mil/
- Through the credit reporting agencies, who have all updated their reports to reflect whether or not an applicant is an active service member.
Using one of those two methods, and documenting the result, “conclusively determines” the issue of whether an applicant is a covered borrower under the MLA.
Military Annual Percentage Rate (MAPR)
The MLA also adds new fees to be considered finance charges when calculating the MAPR. These fees include:
- Premiums or fees for credit insurance;
- Fees for a debt cancellation contract or debt suspension agreement;
- Fees for a credit-related ancillary product sold in connection to the credit transaction or account;
- Application fees (with some exceptions);
- Participation fees;
When you have a non-exempt transaction to a covered borrower, then you need to calculate the MAPR to include the new finance charges with the standard TILA finance charges also. The MLA then caps the rate you can charge a covered member at 36%. If calculating the MAPR with all the fees, new and old, results in a MAPR above 36%, then the creditor has the option of waiving fees and charges above that limit to comply with the MLA cap.
That’s just a brief overview of the basic elements of the MLA. It does not include disclosure requirements, limited terms in agreements, penalties, or other aspects of the MLA. The MLA is already in effect though, so if you’re not sure if you’re compliant with it yet then there is no time to waste.
Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184