New Military Lending Act regulations take effect in October

By Sue Burt

Effective Oct. 3, 2016, final amendments to the Military Lending Act regulation will significantly change how lenders do business with active-duty service members and their dependents. In consideration of financial hardships and service member retention goals, the Department of Defense has expanded the types of transactions subject to the new law, provided new safe-harbor provisions for determining active-duty status, increased the list of fees included in the Military Annual Percentage Rate calculation, and created other new compliance requirements.

Covered transactions

Under current law, the Military Lending Act regulations apply to a limited set of short-term transactions. In effect, the current law is product-based. The final amendments take a different approach and align the definition of a “covered transaction” with the Regulation Z definition of a “consumer credit transaction.” Under the Regulation Z definition, a much greater range of products will be subject to the scope of the military lending regulations.

Note that the final regulations provide for several important exemptions from coverage, including for loans to purchase motor vehicles or personal property that are secured by the vehicles or property. Also exempted are residential mortgage transactions secured by a dwelling; however, loans secured by vacant land are subject to the final regulations.

Borrower status

With the existing regulations, lenders can rely on borrower self-identification to determine active-duty service member status. The final regulations take a different approach and include safe-harbor provisions that involve a review of the DOD military database and/or a consumer credit report. To fulfill the safe-harbor provisions, lenders must adhere to certain recordkeeping requirements.

Other factors

The Military Annual Percentage Rate (MAPR) continues to be a required disclosure and is capped at 36 percent. For closed-end transactions, the MAPR is calculated in the same manner as Regulation Z’s Annual Percentage Rate. For open-end transactions, the MAPR is calculated in the same manner as an effective APR for a billing cycle as required by Regulation Z. Despite the reliance on Regulation Z calculation methods, several fees excluded from the APR are included in the MAPR.

From a disclosure perspective, lenders must provide a written statement of the MAPR that notes the 36 percent cap and describes the type of charges subject to this cap. In addition, a clear description of the payment obligation must be provided. These disclosures also must be provided orally—either in person or via a toll-free phone number.

Beyond disclosures, the Military Lending Act regulations also contain numerous restrictions that impact a transaction’s terms and conditions. Such restrictions include a prohibition on mandatory arbitration and prepayment penalties.


With regard to penalties, there is considerable risk for noncompliance. Penalty provisions range from misdemeanors and jail time for willful violations, to civil money damages, to termination of the transaction and related refunds. And, of course, there is the risk of reputational damage to consider.

Now is the time for lenders to put their Military Lending Act final amendment implementation plan in place. From product line review to system updates to staff training, there’s a lot of work to be done. With no commentary to this regulation, guidance may come in the form of enforcement action—and certainly no one wants to be made an example for the rest of the industry.

Sue Burt (sue.burt@wolterskluwer.com) is a senior compliance consulting specialist with Wolters Kluwer, an ICBA Preferred Service Provider of regulatory compliance consulting, content and technology offerings in Minneapolis.