The Military Lending Act expands protections. Are you ready?

The final rule amending the Military Lending Act (MLA) becomes effective on Oct. 3, 2016, with the exception of credit cards, which have an effective date of Oct. 3, 2017. The final rule provides additional protections for certain types of loans to members of the military that are on active duty, along with their spouses and dependents. The final rule applies to banks, credit unions, savings associations, finance companies, other lenders and any assignee of a creditor.FI MLA FAQ 400x150.jpg

Covered loan types

The final rule applies to both closed-end and open-end credit, including installment loans, vehicle title loans, single-payment loans, unsecured lines of credit, credit cards, payday loans, refund anticipation loans, and other consumer credit. Residential mortgage loans, purchase motor vehicles loans that are secured, personal property loans and other transactions not covered by Regulation Z are not covered by the MLA. Business purpose loans are excluded.

Covered transactions may not have the following features:

• Rollover features — Allowable only if the terms of the new loan are more favorable than the original loan
• No mandatory waivers of consumer protection laws and no mandatory arbitration
• No mandatory allotments — Creditors cannot require an automatic amount of money taken from the covered borrower’s paycheck to repay the loan
• No prepayment penalties

Military annual percentage rate (MAPR)

The final rule states that the maximum APR charged to a covered borrower is 36 percent. This maximum is the MAPR, which differs significantly from the APR under Regulation Z. One aspect of the MLA is that it includes all interest, fees, and charges associated with the loan, including ancillary and “add-on” products, and cannot exceed a maximum of 36 percent. For credit cards, certain fees can be excluded, as long as they are bona fide, and application fees for “small amount loans” as defined by the rule.

For closed-end credit, the MAPR is a one-time calculation made prior to or at the time the loan is made. For open-end credit, the MAPR must be calculated for each billing cycle to determine whether a creditor is within the 36 percent MAPR.

Covered borrower

The MLA is intended to protect all “covered borrowers,” which is defined as a consumer who, at the time he or she is obligated on a credit transaction, is a service member on “active duty” or a spouse or dependent of such person. In determining who is a “covered borrower,” a creditor can use the DOD database information contained in a consumer report issued by a nationwide consumer reporting agency or a reseller of such a credit report. Using either one of these options, the creditor enjoys a safe harbor from liability.

Disclosure requirements

The final rule requires creditors to provide three types of disclosures to covered borrowers:

• An MAPR statement — This statement requires disclosures of the fees that are included in the calculation of the MAPR and other information and must be provided bothin writing and orally
• Regulation Z disclosures, as applicable
• The payment obligation of the covered borrower must be described

Mitigating compliance risk posed by the MLA

•  Determine whether any of loan products offered or in development would fall under the regulatory requirements of the MLA
• Determine whether your loan origination systems have the ability to calculate the MAPR and whether your loan servicing platform has the ability to calculate the MAPR, and provide warnings when the 36 percent limit is exceeded
• Review loan documents for mandatory arbitration clauses and other language that may violate the MLA rule, and make appropriate changes
• Modify existing compliance, loan, servicing and other policies and procedures
• Provide training to your staff and include MLA as part of your compliance monitoring efforts