Written by Eliott C. Ponte, Regulatory Compliance Counsel
On Tuesday, the Department of Defense (DOD) finalized comprehensive changes to its rules that implement the Military Lending Act (MLA). Changes to these rules affect credit unions who offer certain credit products to active servicemembers or their dependents. The new rules become effective on October 1, 2015, but compliance is not required until October 3, 2016. Changes that affect credit cards, however, are delayed until October 3, 2017, with the possibility that the delay can be extended to October 3, 2018.
The final rule contains many complexities and nuances. This blog post provides a high-level summary of the main provisions affecting credit unions. NAFCU’s Regulatory Affairs team will issue a detailed summary of the final rule shortly, which will be available to NAFCU members on our website (member login required). NAFCU issued a Regulatory Alert on the proposed rule last year, which is currently available on our website (14-EA-25). The final rule issued by the DOD was published in the federal register on Wednesday and can be found at 80 FR 43559.
Scope of the Final Rule
The final rule expands MLA protections to a broader range of closed-end and open-end credit. Under the final rule, the phrase “consumer credit” is expanded to include credit extended to a “covered borrower” for personal, family, or household purposes, and is subject to a finance charge or payable by a written agreement in more than four installments. For instance, payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards are covered under the new rule. Certain types of loans, however, are specifically excluded from the definition of “consumer credit.” For example, residential mortgages, motor vehicle loans secured by the vehicle being purchased, and any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased are specifically excluded.
The phrase “covered borrower” includes any member of the armed forces, or their dependents (as defined in 10 U.S.C. § 1072(2)), who is on active duty, or active guard and reserve duty. The final rule allows credit unions to use the existing method for conducting a “covered-borrower check,” which involves the use of a “covered borrower” identification statement, as a safe harbor for compliance until October 3, 2016. After October 3, 2016, credit unions can determine if a borrower is a “covered borrower” by using one of the safe harbor methods listed in the final rule. The safe harbor methods include 1) checking the member’s duty status on the DOD database (available at https://www.dmdc.osd.mil/mla/welcome.xhtml), or 2) using a consumer report obtained from a nationwide consumer reporting agency (at this time, it is not clear how a nationwide consumer reporting agency will identify covered borrowers or their dependents).
Military Annual Percentage Rate and Payday Alternative Loans
The MLA, under the existing and final rules, prohibits a credit union from imposing a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower. Under the final rule, MAPR covers all interest and fees associated with a loan, including most ancillary “add-on” products and application fees, unless excluded from the rule.
One notable exclusion is an application fee charged by a federal credit union when making a qualifying short-term, small amount closed-end loan (e.g., Payday Alternative Loans or PALs). This exemption, which was a NAFCU-sought modification to the proposed rule, specifically excludes from the MAPR calculation an application fee charged to a covered borrower when making a short-term, small amount loan, also known as a PAL loan. The application fee, however, may only be excluded once in a 12-month period. An application fee charged to a covered borrower who applies for a second short-term, small amount loan within the 12-month period of the first loan may not be excluded from the MAPR calculation. See 80 FR 43570. A second noteworthy exclusion is for a credit card fee that is both “bona fide” and “reasonable” for that type of fee. See 80 FR 43573. The final rule sets out specific standards for determining what type of fees are “bona fide” and “reasonable” for that type of fee.