About five years ago, a new rule that impacted financial institution lending to members of the military went into effect. But this one could have been overlooked by financial institutions because it did not come from the traditional bank and thrift regulators. The Department of Defense issued the new rule to implement 2015 changes to the Military Lending Act (MLA), originally known in 2006 as the Talent Amendment.
Some bankers thought they did not make loans impacted by MLA rules because they were not extending payday, vehicle title, or refund anticipation loans — the targets of the original Talent Amendment. But, the revised MLA covers many more consumer loans to service members.
MLA vs. SCRA
One area of confusion is in thinking that the MLA is somehow part of the Servicemembers Civil Relief Act (SCRA). While both laws affect lending to members of the military, there are basic differences in when and to what types of credit their protections apply and what those protections are.
The SCRA applies to loans extended to servicemembers in their civilian life, and its protections kick in when they enlist or are called up to active duty. SCRA provisions apply to all types of credit, including business loans to service members.
On the other hand, the MLA applies only to consumer credit (with certain exceptions) entered into by active-duty service members.
MLA-covered loans
The limited coverage of the Talent Amendment, noted above, meant that it did not concern most bankers because they did not generally make those types of credits.
But this is not so with the new MLA. It applies to “consumer credit” to a covered borrower (for personal, family, or household purposes) subject to a finance charge or payable by written agreement in more than four installments — which is like the familiar Regulation Z we have dealt with for over 45 years.
There are exceptions. The MLA rule does not apply to:
- Mortgage loans, that is, loans secured by a dwelling. These include home purchase loans, home equity loans, and home equity lines of credit.
- Loans expressly to purchase a motor vehicle and secured by the vehicle
- Loans expressly to purchase personal property and secured by that property
One area of confusion is in thinking that the MLA is somehow part of the Servicemembers Civil Relief Act (SCRA). While both laws affect lending to members of the military, there are basic differences in when and to what types of credit their protections apply and what those protections are.
Identifying a covered borrower
Lenders are permitted to ask applicants if they are members of the military, but this way will not provide the lender with the protection of a safe harbor in the MLA rule. To avail itself of the safe harbor, a lender must use one of two specified ways to conclusively determine coverage. The safe harbor methods are:
- Querying the MLA lookup webpage from the Defense Manpower Data Center (DMDC) at mla.dmdc.osd.mil. After the lender enters the consumer’s information in the search form, the system will return a certificate identifying whether the borrower is an MLA-covered service member or a family member.
- Using information in a credit report from a nationwide consumer reporting agency or a reseller to determine MLA status. The nationwide bureaus are granted access to the MLA database to make these determinations and provide some sort of MLA indicator in a borrower’s credit report.
Covered borrower status must be determined before a loan is closed, not after closing, to see if MLA protections should have applied.
MLA requirements
The three general protections afforded covered borrowers by the MLA rule are:
- Military annual percentage rate (MAPR) of no more than 36 percent. The MAPR differs from the Regulation Z APR because it is an “all in” — taking into account not only the finance charge but also many fees Regulation Z excludes from the finance charge (including some application and participation fees, credit insurance fees and premiums, and fees for credit-related ancillary products).
- Disclosure of a statement of the MAPR (not necessarily its numerical value) describing the charges imposed that go into the calculation of the MAPR. A model statement is provided in the rule. This disclosure must be given both orally and in writing, but the oral disclosure may be given either in-person or through a toll-free telephone number.
- Restrictions against lenders requiring waivers of the MLA protections, mandated use of arbitration, requiring allotments of military pay for loan repayment, and imposing prepayment penalties.
Penalties & resources
Failure to follow the MLA rule can result in:
- Noncomplying notes or credit agreements being void from inception
- Monetary penalties, including punitive damages
- Reputation damage (e.g., for “overcharging” military members)
The 2015 MLA rule is available at https://www.govinfo.gov/content/pkg/FR-2015-07-22/pdf/2015-17480.pdf. In 2016, the DoD issued an Interpretive Rule that answers a number of questions that have been posited to the department about its 2015 rule, and this interpretive document can be found at https://www.govinfo.gov/content/pkg/FR-2016-08-26/pdf/2016-20486.pdf.
The DoD updated its Interpretive Rule in December 2017 by revising three answers and adding one new question and answer, which can be accessed at https://www.govinfo.gov/content/pkg/FR-2017-12-14/pdf/2017-26974.pdf.
Another resource useful to lenders is an MLA Flowchart issued by the Consumer Financial Protection Bureau (CFPB), available at https://files.consumerfinance.gov/f/documents/cfpb_servicemembers_mla-applicability-flow-chart.pdf.
William J. Showalter, CRCM, CRP, is a Senior Consultant with Young & Associates, Inc. (younginc.com), with over 35 years experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also develops and conducts compliance training programs for individual banks and their trade associations and has authored or co-authored numerous compliance publications and articles. Bill can be reached at wshowalter@younginc.com.
