By: James M. Moore, CRCM
Financial Institution Specialist
The Department of Defense (DOD) has used its rule making authority under the Military Lending Act to expand the protections afforded to our service members. The Military lending Act initially provided significant protections in three loan categories to active military members and their families:
- Closed-end payday loans for no more than $2,000 and with a term of 91 days or less;
- Closed-end auto title loans with a term of 181 days or less; and
- Closed-end tax refund anticipation loans.
The new final rule will expand coverage of the protections of the Military Lending Act to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. The changes to the definition of credit in the final rule bring any closed or open-end loan within the scope of the regulation, except for residential mortgage transactions or a purchase-money loan such as a loan to finance the purchase of a vehicle.
The implementing regulation provides several significant protections extended to active duty service members and their families.
A special 36 percent APR is in effect. This cap, which is referred to as the Military Annual Percentage Rate or MAPR, covers all interest and fees associated with the loan. This limit now includes charges for most ancillary “add-on” products such as credit default insurance and debt suspension plans. The following disclosure will be required for all covered loans: “Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).”
The MLA prohibits creditors from requiring service members to: submit to mandatory arbitration and onerous legal notice requirements; waive their rights under the Service Members’ Civil Relief Act; provide a payroll allotment as a condition of obtaining credit (other than from relief societies); be able to refinance a payday loan; or be able to secure credit using a post-dated check, access to a bank account (other than at an interest rate of less than 36 percent MAPR), or a car title (other than with a bank, savings association or credit union).
New safe harbor requirements will require a creditor to legally conclusively determine whether a consumer is a covered borrower by using information obtained either: (i) Directly or indirectly from the MLA Database or (ii) in a consumer report from a nationwide consumer reporting agency or a reseller who provides such a consumer report. If the creditor uses one of these two methods (or both, as the creditor may elect), the creditor’s determination would be conclusive with respect to that transaction or account involving consumer credit, so long as the creditor maintains a record of the information so obtained.
Tip: Contact your credit report provider to determine if they will be able to conduct the search as part of the credit report.
Mandatory compliance for the final rule is set for October 3, 2016 with delayed implementation dates for the following:
- Providing a temporary exemption for credit extended in a credit card account under an open-end (not homesecured) consumer credit plan. The exemption for a credit card account expires, at minimum, in October 2017, and the rule permits that exemption to be extended for up to one year;
- Permitting a creditor, until October 3, 2016, to continue to use the method described in the existing rule for conducting a covered-borrower check, which involves the use of a covered borrower identification statement, as a safe harbor for compliance. After October 3, 2016, a creditor seeking a safe harbor for compliance with the rule may elect to: use either of the new methods for conducting a covered-borrower check (and keep a record accordingly) set forth in § 232.5(b).
Several questions and concerns about the final rule were posed by financial institutions and the DOD issued clarifications on the final rule. Several clarifications were made that are of significant importance to community banks. First, the DOD clarified that rule applies to purchase transactions secured by the property purchased where additional funds are advanced as part of the purchase for other purposes. Second, financial institutions are allowed to a take a security interest in a specific deposit account such as a CD. The prohibition of deposits only applies to the general right of setoff.
The entire Q&A clarification can be found at:
https://www.federalregister.gov/documents/2016/08/26/2016-20486/military-lending-act-limitations-on-terms-of-consumer-credit-extended-to-service-members-and
- Closed-end payday loans for no more than $2,000 and with a term of 91 days or less;
- Closed-end auto title loans with a term of 181 days or less; and
- Closed-end tax refund anticipation loans.
The new final rule will expand coverage of the protections of the Military Lending Act to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. The changes to the definition of credit in the final rule bring any closed or open-end loan within the scope of the regulation, except for residential mortgage transactions or a purchase-money loan such as a loan to finance the purchase of a vehicle.
The implementing regulation provides several significant protections extended to active duty service members and their families.
A special 36 percent APR is in effect. This cap, which is referred to as the Military Annual Percentage Rate or MAPR, covers all interest and fees associated with the loan. This limit now includes charges for most ancillary “add-on” products such as credit default insurance and debt suspension plans. The following disclosure will be required for all covered loans: “Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).”
The MLA prohibits creditors from requiring service members to: submit to mandatory arbitration and onerous legal notice requirements; waive their rights under the Service Members’ Civil Relief Act; provide a payroll allotment as a condition of obtaining credit (other than from relief societies); be able to refinance a payday loan; or be able to secure credit using a post-dated check, access to a bank account (other than at an interest rate of less than 36 percent MAPR), or a car title (other than with a bank, savings association or credit union).
New safe harbor requirements will require a creditor to legally conclusively determine whether a consumer is a covered borrower by using information obtained either: (i) Directly or indirectly from the MLA Database or (ii) in a consumer report from a nationwide consumer reporting agency or a reseller who provides such a consumer report. If the creditor uses one of these two methods (or both, as the creditor may elect), the creditor’s determination would be conclusive with respect to that transaction or account involving consumer credit, so long as the creditor maintains a record of the information so obtained.
Tip: Contact your credit report provider to determine if they will be able to conduct the search as part of the credit report.
Mandatory compliance for the final rule is set for October 3, 2016 with delayed implementation dates for the following:
- Providing a temporary exemption for credit extended in a credit card account under an open-end (not homesecured) consumer credit plan. The exemption for a credit card account expires, at minimum, in October 2017, and the rule permits that exemption to be extended for up to one year;
- Permitting a creditor, until October 3, 2016, to continue to use the method described in the existing rule for conducting a covered-borrower check, which involves the use of a covered borrower identification statement, as a safe harbor for compliance. After October 3, 2016, a creditor seeking a safe harbor for compliance with the rule may elect to: use either of the new methods for conducting a covered-borrower check (and keep a record accordingly) set forth in § 232.5(b).
Several questions and concerns about the final rule were posed by financial institutions and the DOD issued clarifications on the final rule. Several clarifications were made that are of significant importance to community banks. First, the DOD clarified that rule applies to purchase transactions secured by the property purchased where additional funds are advanced as part of the purchase for other purposes. Second, financial institutions are allowed to a take a security interest in a specific deposit account such as a CD. The prohibition of deposits only applies to the general right of setoff.
The entire Q&A clarification can be found at:
https://www.federalregister.gov/documents/2016/08/26/2016-20486/military-lending-act-limitations-on-terms-of-consumer-credit-extended-to-service-members-and
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