It is time to start preparing for changes coming to the Military Lending Act that will expand the protections provided to service members and their families. Most of these changes are effective October 3, 2016, and compliance is required beginning October 3, 2017, for credit extended for new credit card accounts under an open-end consumer credit plan.
What Is Affected
The rules apply to consumer credit which is defined as “credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and is subject to a finance charge or payable by a written agreement in more than four installments.” This will include vehicle title, installment, unsecured open-end lines of credit, payday, refund anticipation, credit cards and deposit advance loans. The rule provides exemptions for residential real estate and vehicle-secured purchase money loans. Covered transactions are capped at offering a Military Annual Percentage Rate (MAPR) at 36 percent, requiring disclosures to alert service members and their dependents of their rights and prohibiting creditors from requiring arbitration in the event of a dispute.
In addition to the finance charges under Regulation Z, the MAPR includes credit insurance premium or fee, debt cancellation or debt suspension fee, debt default, insurance and debt suspension plans, and application fees. The application fee is exempt for insured depository institutions for a closed-end loan that is subject to Regulation Z, as long as the term does not exceed nine months and the application fee is a fixed limit. If this credit is renewed within 12 months, the subsequent application fee is not eligible for exclusion. In addition, there are some exclusions for credit card fees that are “bona fide.”
The bank is provided with a safe harbor when they apply certain methods of assessing whether or not a consumer is a covered borrower. There are two options to obtain the safe harbor:
- Using information obtained from the Military Lending Act database
- Relying on information contained in a consumer report and both are subject to meeting recordkeeping requirements
Prior to October 3, 2016, the bank may continue to rely on the covered borrower statement obtained from the borrower. There are timing requirements for determining the covered borrower status. The creditor may only rely on an initial determination when a consumer initiates or establishes a transaction; or 30 days prior to when the creditor extends a firm offer of credit and the covered borrower responds within 60 days.
The creditor, in addition to the written disclosures, must provide orally the statement of the MAPR and a description of the payment obligation, but they will no longer be required to provide the periodic rate and the total dollar amount of the MAPR. There are two options for the oral disclosures, in person or by providing a toll-free number that the borrower may use to obtain the disclosures. If the creditor elects to provide the toll-free number, it must be included on the application form or with the statement of MAPR. The rule provides model language for describing the MAPR. Disclosures are required only for new transactions.
To prepare for the changes, banks will want to consider utilizing a toll-free number for the service member or dependent to call to obtain the required oral disclosure, as well as follow up with third-party service providers to ensure that system changes will be made by October 3, 2016, so they can begin training staff.