The Military Lending Act (MLA), as implemented by the DOD, limits the military annual percentage rate (MAPR) that a creditor may charge to a maximum of 36 percent, requires certain disclosures, and provides other substantive consumer protections on “consumer credit” extended to service members and their families. Effective October 3, 2016, credit unions must comply with the revisions to the MLA implemented by the Department of Defense. Information and resources here are offered to help credit unions understand the MLA and act accordingly.
DOD Final Rule: Military Lending Act
In July 2015, the DOD amended its regulation effective October 3, 2016. The rule's primary purpose is to extend protections of the MLA to a broader range of closed-end and open-end credit products. The July 2015 final rule also modified provisions relating to the optional mechanisms a creditor may use when assessing whether a consumer is a covered borrower, modified the disclosures a creditor must provide, and implemented the enforcement provisions of the MLA.
The Consumer Financial Protection Bureau (CFPB) MLA Interagency Exam Procedures were updated September 20, 2016.
The National Credit Union Administration (NCUA) is granting leeway to credit unions on the good faith that reasonable measures are being taken to fully comply. However, credit unions are not shielded from third-party liability for issues that may arise during transition. The NCUA has provided three regulatory alerts to provide guidance for compliance. Direct any questions or concerns to the NCUA Office of Examination.
Covered Borrower Identification
Use the MLA Website to verify the covered borrower status of individuals. The website is capable of providing an instantaneous response for an inquiry on a single individual and allows you to run batches of up to 250,000 individuals with results usually within 24 hours. Should you experience any problems with the website, or have any further inquiries about MLA, please email the Help Desk.
MLA Interpretive Guidance
The DOD’s MLA guidance—which includes a total of 19 questions and answers—addresses, among other details:
- The types of products included within the scope of “consumer credit” (i.e., overdrafts, loans to purchase personal property);
- The calculation of the MAPR, including application of the safe harbor for certain bona fide credit card fees;
- The application of the covered borrower identification safe harbor, including that the safe harbor extends a creditor’s assignee;
- The manner in which a creditor may orally provide the required payment obligation disclosure;
- A creditor’s use of a “savings clause” in credit agreements to covered and non-covered borrowers, which limits application of proscribed terms to non-covered borrowers;
- A creditor’s ability to accept payments by check and electronic fund transfer, and whether a creditor may take a security interest in funds deposited within a covered borrower’s account; and
- The methods of transportation included within the definition of a “vehicle.”
For further detail, see the August 26, 2016 Interpretive Rule.
Military Annual Percentage Rate (MAPR)
The military annual percentage rate (MAPR) is calculated to include not only those items which are finance charges under section 1026.4 of Regulation Z, but also specific fees that may otherwise be excluded by Regulation Z. See 32 C.F.R. § 232.4(c)(1)(iv).
Specifically, the MAPR includes:
- Any credit insurance premium or fee, including charges for single premium credit insurance;
- Any fee for a debt cancellation contract or any fee for a debt suspension agreement; and
- Any fee for a “credit-related ancillary product” sold in connection with the loan.
The DoD’s rationale in the rule’s preamble for including these fees is that “most, if not all, of [these products] are not suitable for a covered borrower because the military services already provide insurance or other benefits to a service member that would adequately provide financial resources even in an event of coverage (e.g., disability)…” Also these terms are not specifically defined, leading to ambiguity especially given the broad nature of what could be a credit-related ancillary product.
It may be helpful to start with how these programs are treated under relevant provisions of Regulation Z. For example, Regulation Z does not typically consider these programs to be debt cancellation products, here is the relevant commentary:
The term “debt suspension” does not include loan payment deferral arrangements, in which the triggering event is the bank's unilateral decision to allow a deferral of payment and the borrower's unilateral election to do so, such as by skipping or reducing one or more payments (“skip payments”).
Also the fees themselves for a skip-a-pay program are generally viewed as “unanticipated” fees that are not included in the definition of “finance charge” unless built into the loan cost.
Again, Regulation Z does not control what fees are pulled in the MAPR, but the MAPR is intended to incorporate costs that are explicitly excluded from Regulation Z. Unfortunately, the MLA does not specifically address this issue but it may be worth considering whether these kinds of programs are similar to debt suspension programs in light of the DoD’s broad approach to the products included in the MAPR. Fees for skip a pay programs seem to be in a gray area and may require consulting with counsel for a legal opinion.
Section 232.4(c)(2)(i) and (ii) of the final rule specifies how to calculate the MAPR:
(i) Closed-end credit
For closed-end credit, the MAPR shall be calculated following the rules for calculating and disclosing the “Annual Percentage Rate (APR)” for credit transactions under Regulation Z based on the charges set forth in paragraph (c)(1) of this section. […]
(ii) Open-end credit
(B) Except as provided in paragraph (c)(2)(ii)(B) of this section, for open-end credit, the MAPR shall be calculated following the rules for calculating the effective annual percentage rate for a billing cycle as set forth in § 1026.14(c) and (d) of Regulation Z (as if a creditor must comply with that section) based on the charges set forth in paragraph (c)(1) of this section. Notwithstanding § 1026.14(c) and (d) of Regulation Z, the amount of charges related to opening, renewing, or continuing an account must be included in the calculation of the MAPR to the extent those charges are set forth in paragraph (c)(1) of this section. (Emphasis added.)
For closed-end credit, the preamble clarifies that this involves applying the standards in 12 C.F.R. § 1026.22(a)(1) and the explanations and instructions found in Appendix J to Regulation Z.
For open-end credit, the MAPR is calculated by following the rules in section 1026.14(c) and (d) of Regulation Z, using all charges that must be included in the MAPR, including “charges relating to opening, renewing, or continuing an account” as set forth in section 232.4(c)(1). However, if the MAPR cannot be calculated in a particular billing cycle because there is no balance, then the credit union may not impose any fee or charge for that cycle. There is an exception for a participation fee of no more than $100 annually that may be charged in any billing cycle. However, this does not mean that a participation fee must be below $100 in order to be bona fide and reasonable and thus excluded from the MAPR.
Because the complex formulas from Regulation Z are cross-applied for computing the MAPR, credit unions may need to work with either their loan origination or core systems providers when making this calculation.11
Essentially, the MAPR is adding additional figures into the existing Regulation Z APR calculation function. Moreover, as noted above, the MAPR for open-end credit must be computed each billing cycle. This can present additional challenges when working with loan origination or core systems providers since many open-end consumer credit products have not recently been subject to this requirement prior to these changes to the MLA.
11 Depending on the structure of your credit union’s systems, the credit union may actually need to address this issue with both the loan origination and core systems providers. For example, all information may need to carry through from one system to the other to ensure proper calculation throughout the period of time that the member is a covered borrower.
The preamble to the rule offers an example of how credit unions are expected to make these types of calculations.
(S)uppose a creditor offers a line of credit to a covered borrower primarily for personal, family, or household purposes (commonly referred to as a “personal line of credit”), and permits the borrower to repay on a monthly basis. Upon establishing the personal line of credit, the covered borrower borrows $500. The creditor charges a periodic rate of 0.006875 (which corresponds to an annual rate of 8.25 percent), plus a fee of $25, charged when the account is established and annually thereafter. Under these circumstances, pursuant to § 1026.14(c)(2) of Regulation Z the creditor would calculate the MAPR as follows: “dividing the total amount of the finance charge for the billing cycle”—which is $3.44 (corresponding to (0.006875) × ($500)), plus $25—“by the amount of the balance to which it is applicable”—$500—and multiplying the quotient (expressed as a percentage) by the number of billing cycles in a year”—12 (since the creditor allows the borrower to repay monthly), which is 68.26 percent. In this example, even though the periodic rate (0.006875) would comply with the interest-rate limit under § 232.4(b), the resultant MAPR would be in excess of that limit because the amount borrowed is low at the time the annual fee is imposed. If the covered borrower instead borrows a higher amount, then the creditor still could impose the $25 annual fee and comply with § 232.4(b); for example, if the amount initially borrowed is $1,400, then the resultant MAPR would be 24.73, well below the 36 percent limit.
The DoD notes that while it reasonably expects creditors, including credit unions, to be able to estimate at the beginning of the billing cycle whether the total amount of premiums and fees charged during that period will exceed the 36 percent cap, creditors can still comply with the rule by waiving fees or premiums charged in excess of those allowed under the MLA.
MLA and Servicemembers Civil Relief Act (SCRA) Considerations
There are applicability differences between the MLA and SCRA. Make sure procedures address:
- The member must notify the credit union of their active duty.
- Changes will be made to loans consummated prior to active duty.
- The credit union must determine a covered borrower.
- There is no “lookback.” Determination of coverage is made during consummation.
- 6% interest rate only applies to debts incurred prior to active duty.
- Relief ends when the member returns from active duty (or for mortgage related debt, 12 months following their return).
- The 36% MAPR limitation is for the life of the loan and determined at the time of consummation.
- Unless they are joint obligors on a loan, dependents generally are not entitled to receive the reduced rates.
- Protections also are provided to service members in the foreclosure process.
- Dependents are defined differently and the protections under the Act also apply to them.
Question: Betty Borrower is a member of the armed forces, but not on active duty and holds an auto loan from 2014 with the credit union. On January 11, 2016, Betty is ordered to service on active duty. Does the credit union need to adjust anything with that auto loan?
Answer: Under the MLA, the credit union does not need to adjust anything related to the loan. “Covered” borrower status is only determined at the time the member is obligated on the transaction. However, according to the SCRA, the loan may need to be adjusted (6%) if the borrower provides documentation of active duty status to the credit union.
Make sure your front line staff understand the difference.
CUNA eGuide: Military Lending Act
Webinar: Preparing to Comply with Regulatory Changes Under the Military Lending Act
Final Rule: Limitations on Terms of Consumer Credit Extended to Service Members and Dependents (Federal Register, July 22, 2015)
Q&A from CUNA's September 13 MLA Webinar (September 2016)