Changes to Military Lending Act on the Horizon

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Changes to Military Lending Act on the HorizonThe Department of Defense (DoD) recently published its Final Rule amending the Military Lending Act’s (MLA) implementing regulation. The MLA, passed by Congress in 2006, provides active duty service members and their dependents with certain protections in a limited number of consumer credit transactions. It originally applied to (1) closed-end payday loans of less than $2,000 with a maximum term of 91 days; (2) closed-end motor vehicle title loans with a maximum term of 181 days; and (3) closed-end tax refund anticipation loans. A creditor extending any such covered loan may not impose a Military Annual Percentage Rate (MAPR) greater than 36% to a covered borrower.

The Final Rule extends the MLA’s 36% interest cap and other restrictions to several consumer credit products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act, deposit advance, refund anticipation, vehicle title, and payday loans. Residential mortgages and purchase-money personal property loans are excluded. The additional restrictions create new risks for lenders in indirectly imposing limitations on the “add-on” products such as credit insurance, debt suspension, and debt cancellation contracts to active-duty service members and their dependents.

The Final Rule does not explicitly prohibit the sale of these “add-ons,” but requires the associated costs to be included in the MAPR calculation. Because few of these products can be purchased without pushing the MAPR above the stated limit, the Final Rule has the effect of precluding the sale of these “add-on” products.  The MAPR does exclude “bona fide” fees charged to credit card accounts, provided they are reasonable. Reasonableness is determined by comparison to fees “typically imposed by other creditors for the same or a substantially similar service.” The “bona fide” fees exclusion applies to any fees other than fees for “add-on” products such as credit insurance, debt suspension, and debt cancellation contracts. Fees that can be excluded as “bona fide” include application fees, annual fees and cash advance fees.

A change from the proposed rule, the Final Rule does not require the use of a particular method for ascertaining whether an applicant is a covered borrower. However, there is a safe harbor provision for lenders allowing use of either the DoD’s online database or a consumer report from a nationwide consumer reporting agency. Transactions in violation of the MLA are void from inception, and knowing violations constitute a misdemeanor. There is also private right of action whereby plaintiffs may recover actual damages of not less than $500 per violation, plus punitive damages, attorneys’ fees, and other remedies.  There are additional safe harbor provisions for reasonableness of bona fide fees, and a bona fide error defense.

The Final Rule takes effect on October 1, 2015.  Compliance will be required by October 3, 2016.  There is a two-year exemption for credit card accounts until October 3, 2017.