8/30/2016 - By Kristen J. Stogniew, Esq., CFE
Last July, the Department of Defense (DOD) expanded the reach of the Military Lending Act (MLA), which protects against high cost and predatory loans to covered members of the armed forces or their dependents. As you can imagine, the MLA governed such loans as payday lending, vehicle title lending, refund anticipation and deposit advance loans. However, beginning October 3, 2016, non-purchase money consumer installment loans and lines of credit will also be covered. And next year, it is likely that unsecured open-end lines of credit and credit cards will be covered as well. The DOD’s Rules implementing the Act are found at 32 CFR Part 232.
On Friday, August 26, 2016, the DOD published an Interpretive Rule (IR), which addressed several questions the consumer credit industry had regarding implementation of the MLA changes. Below is a summary of the MLA’s requirements and some important clarifications from the recent IR.
It is important to note that, for the MLA to apply to any given loan/line, a borrower must be a covered member at the time the account is opened -- unlike the SCRA, the MLA does not apply to existing loans or lines if the borrower subsequently becomes covered -- and MLA protections cease automatically when the borrower is no longer covered, i.e., end of active duty. Also, the rule does not require a creditor to determine the covered borrower status of any loan applicant; a creditor could simply control its product offerings and fees so that no applicable loan/line would ever violate the MLA prohibitions, and provide the MLA-required disclosures/contractual provisions to all its consumer credit borrowers.
However, if a creditor does choose to determine a borrower’s covered status, the MLA provides two legally conclusive means to do so, but the determination must be done prior to the account opening: (a) by accessing the DOD’s MLA database -- either through the query method, which can take up to 24 hours, or through approved direct access which is only granted to the largest inquirers -- or (b) through a credit report provided by a nationwide consumer reporting agency. We understand that the reporting agencies are working to be able to provide covered member status on credit reports prior to the effective date.
If the MLA applies, the loan/line must not have a Military Annual Percentage Rate (MAPR) above 36%. The MAPR includes all interest and finance charges associated with the loan as well as other charges, like application and participation fees, and charges for “add-on” products such as credit default insurance and debt suspension plans. The August 2016 IR provides guidance for calculating the MAPR on open-end lines of credit, which must be done for each billing cycle. Importantly, the IR clarified that a creditor can simply waive application of any fee(s) that would bring the monthly MAPR above this threshold. We would think that a creditor’s core systems could easily be re-programed to conduct this check every statement cycle.
For MLA loans, in addition to the written disclosures already required by Regulation Z and a model statement regarding the MAPR, the covered borrower must receive a clear, oral description of the MAPR and payment obligation prior to the transaction. The MLA allows a toll-free phone number to be provided for this purpose when transactions are not conducted in-person, and the August 2016 IR provides various ways a creditor can describe the payment obligation – unfortunately, no model statements are provided here.
For most of our clients, the final important clarifications of the August 2016 IR involve the MLA’s prohibitions against a creditor from using a post-dated check or creating a remotely created check, drawn against the covered member’s deposit account, to repay a consumer loan. The industry was concerned, and received the needed clarification, that the MLA does not prohibit -- where allowed by other laws: (a) the voluntary use of preauthorized use of EFTs for repayment, (b) the grant of a security interest in an existing deposit account or one opened in connection with the transaction (i.e., a deposit account secured loan), or (c) the statutory banker’s lien/right of offset in a covered member’s deposit accounts with the creditor.
The August 2016 IR addressed other issues requested by the industry, so please go have a read on your own. If you have any questions in implementing the MLA rule, please do not hesitate to contact me at Kristen.Stogniew@SaltmarshCPA.com.
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