Military Lending Act


New Military Lending Act regulations kick in next fall

By Mary Thorson Wright

Following a three-year study on predatory lending, the U.S. Department of Defense has now issued the final rule to implement the Military Lending Act. The law defines “consumer credit” very narrowly; however, the department’s rule extends coverage to additional products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act. The rule also includes all types of deposit advance, refund anticipation, vehicle title and payday loans (residential mortgages and purchase-money personal property loans are excluded).

The effective date of the final rule was Oct. 1, 2015, and compliance with the rule is required by Oct. 3, 2016. Credit card accounts are exempt from compliance until Oct. 3, 2017.

A “covered borrower” under the rule is an active-duty member of the U.S. armed forces or servicemembers on active National Guard or Reserve duty, their spouses and their card-carrying dependents. The rule’s definition includes servicemembers on active duty under a call or order that specifies a service period longer than 30 days.

The rule defines a “creditor” as a business that is engaged in extending consumer credit and meets the criteria under Regulation Z with respect to extensions of consumer credit to covered borrowers.

The Department of Defense’s rule extends the types of closed-end and open-end consumer credit products covered under the Military Lending Act to align with the Truth in Lending Act and Regulation Z. It governs credit offered or extended to a covered borrower primarily for personal, family or household purposes, and that is subject to a finance charge or payable by a written agreement in more than four installments.

Credit products that are not covered under the department’s rule include residential mortgages (including refinancing, home equity loans or lines of credit, and reverse mortgages); credit to finance the purchase of a vehicle and secured by the vehicle being purchased; or credit intended to finance the purchase of other personal property when the credit is secured by the property being purchased. Transactions not covered by Regulation Z are excluded from coverage under the rule.

Beginning Oct. 3, 2016, the rule will allow a creditor to rely on the servicemember’s statement or use its own method to assess the borrower’s eligibility. There is a safe harbor for lenders that do so using either the Department of Defense’s online database or a consumer report from a nationwide consumer-reporting agency.

The rule includes the following borrower protections:

  • Caps annual interest rates (the Military Annual Percentage Rate, or MAPR) for consumer credit to military borrowers at 36 percent, including all fees and charges and including ancillary charges for products (such as “add-on” products) sold in connection with a covered loan.
  • Requires written and oral disclosure of interest rates and payment obligations before a loan is issued. (The rule provides model language for written disclosures.)
  • Prohibits rollovers, or same-creditor refinances, renewals or consolidations for payday loans.
  • Makes violations a misdemeanor and preserves remedies, including awarding of damages and voiding of contracts.

Your community bank should review how the rule’s requirements will affect its products and services to prepare for the rule’s Oct. 3, 2016, compliance date. Its review should include third-party management and risk-assessment practices for any changes required.

Mary Thorson Wright, a former Federal Reserve managing examiner, is a financial writer in Virginia.