Lenders need to comply with updated regulations designed to protect military service members from predatory lending practices, or they could face consequences.
Enacted in 2006 and implemented by the Department of Defense, the Military Lending Act protects active-duty military personnel, their spouses and dependents from predatory lending practices.
In 2015, the DoD amended the act’s rules to include a broader range of closed-end and open-end credit products and made important changes to checking a borrower’s military status and credit product disclosures to provide greater protections to service members and their families, according to Joseph Gormley, assistant vice president and regulatory counsel for the Independent Community Bankers of America.
“Initially the act only covered small dollar loans like payday loans and installment loans, which were prevalent in military families,” said Joann Needleman, immediate past president of the board of directors of the National Creditors Bar Association, a trade association dedicated to serving law firms engaged in the practice of creditors rights law.
“Now the act covers all consumer credit transactions including credit cards, and in some cases, overdraft protection if finance charges are associated with the product,” said Needleman, who serves on the Consumer Financial Protection Bureau Advisory Board.
Enforcement of the new MLA rules will be led by the CFPB, which updated its examination procedures last fall to assess lender compliance.
The MLA caps the Military Annual Percentage Rate at 36%, which includes, except in limited exceptions, all fees and charges. The act expands coverage of its protections to a service member’s spouse, children under 21 and in some cases over 21, and parents of service members who live in the household.
Violations of the act can result in stiff civil penalties, including potentially voiding the transaction as well as monetary damages and fines. Knowing violations potentially can result in misdemeanor charges, which could include fines and possible imprisonment.
For most products, creditors were required to comply with the DoD’s 2015 rule as of last October. For credit card accounts, compliance is required by Oct. 3, 2017.
“The most important thing for community banks is to have a system in place to ensure that they are checking whether potential borrowers are covered by the MLA,” Gormley said. “These checks cannot be done retrospectively and must be done when the borrower applies for credit.”
Perhaps the most difficult challenge for lenders is ensuring they stay within the MAPR of 36%, Needleman said.
“Many of the application fees and finance charge are not traditionally counted as finance charges under TILA [Truth in Lending Act], but for the MLA they are,” she said. “Lenders will now need to segregate MLA accounts from that of other borrowers to make the proper determination of APR, because now under these two set of borrowers they are different. ”
The process is further complicated since the MLA includes credit card accounts that in some cases lenders can exclude reasonable fees from the MAPR calculations, Needleman said.
“Everyone offering open-end credit is concerned about this. The math doesn’t make any sense,” said Nessa Feddis, senior vice president and deputy chief counsel for Consumer Protection and Payments at the American Bankers Association’s Center for Regulatory Compliance.
The rule doesn’t yet apply to credit cards, but “the way they calculated the MAPR is to treat it as an annual fee, which is imposed once a year as if it’s imposed 12 times a year. That makes no sense. That means a loan that charges $50 a year has the same MAPR that charges $50 a month. I don’t think you need to be a mathematician to say something is wrong with this.”
Another concern is a requirement that community banks must have a system in place for delivering the oral disclosures.
The DoD said information had to be disclosed orally or by an 800 number, but a lot of community banks don’t have one, according to Feddis.
“I get the question, ‘Can we call them?’ And the answer is ‘No, that’s not what the regulation says,’” Feddis said. “I think they realize now there may be some things they need to fix. I don’t expect DoD to be experts in banking laws.”
The expanded MLA may keep some lenders who are unclear about the rules changes from offering car loans, Feddis said.
“It’s easier to say ‘We’re not going to make the loans because it’s not clear what a compliant loan is and it’s so complicated,’” she said.
The rule changes may help prevent some predatory lending to borrowers, Feddis said, but it also means “they may be denied mainstream loans that they want and are capable of managing.”
Banking regulators and the bureau encourage banks to make small dollar loans so people won’t go to payday lenders, but “it’s difficult to be able to make a small dollar loan that complies with the rules that’s sustainable,” Feddis said.
“I think you will see they may not be available to military personnel or they won’t be available to anybody because they are just one more cost and potential liability,” Feddis said.
Freelance writer Robin Farmer contributed to the writing and research of this article.
To learn about a new Military Lending Act course offered by OnCourse Learning, click here.