On July 22, 2015, the U.S. Department of Defense published final amendments to the Military Lending Act (MLA) regulation for consumer credit loans (excluding residential mortgages and purchase money loans, which aren’t considered covered loans), effective October 3, 2016. For credit card accounts, the rule will become effective October 3, 2017, unless extended by the U.S. Secretary of Defense.
Under the final rule, lenders may not exceed a 36 percent Military Annual Percentage Rate (MAPR), which is calculated to include application, participation, annual and other fees that aren’t considered finance charges under Regulation Z. The MAPR calculation also includes fees and premiums for credit insurance, debt cancellation and debt suspension fees for credit-related ancillary products. However, certain payday alternative loans offered by credit unions pursuant to the National Credit Union Administration rules are eligible for exclusion of application fees from the MAPR calculation.
In addition to the 36 percent MAPR cap, the rule also limits or prohibits:
- Subjecting the covered borrower to arbitration
- Requiring the covered borrower to waive the right to legal recourse
- Imposing other onerous legal notice provisions
- Demanding “unreasonable notice from the borrower as a condition for legal action”
- Using a check to access a bank account—subject to exceptions
- Prepayment penalties
Lenders are obligated to determine the borrower’s military status by accessing the MLA database or obtaining this information from a credit reporting agency. Covered borrowers generally are members of the armed forces on active duty or active guard and reserve duty or one of their dependents. Accounts established prior to active duty and borrowers who were covered at account establishment but no longer are on active duty are not covered.
Covered credit is defined as credit offered or extended primarily for personal, family or household purposes and subject to a finance charge or payable by written agreement in more than four installments. In general, overdraft lines of credit and deposit advance products are covered, but overdraft protection services are not.
The final rule also includes various disclosure requirements, including an MAPR description (without the requirement to disclose the numerical MAPR as a percentage), disclosures required by Regulation Z and a clear description of the payment obligation. For closed-end credit, a payment schedule could suffice. The disclosures must be provided in writing before or at the time the borrower becomes obligated on the transaction or establishes a consumer credit account. In addition, the MAPR and payment obligation must be provided orally. A toll-free number may be used for this purpose.
Rule-breaking creditors will be subject to criminal penalties as well as voidance of the contract, private rights of action and costs of the action, including reasonable attorney fees.