Military Lending Act (MLA)

Military Lending Act (MLA)
Glory LeDu Director of League System Relations

Department of Defense (DOD) Military Lending Act (MLA)

DOD – Military Lending Act
What is the Military Lending Act? Protects active duty members of the armed forces and their dependents from excessive interest rates, requires specific disclosures, and prohibits creditors from requiring arbitration in the event of a dispute. The MLA is implemented by the Department of Defense (DOD), but enforced by the CFPB and other federal regulators.

Effective Date: October 1, 2015. Effective Compliance for Loans: October 3, 2016 Effective Compliance for Credit Cards: October 3, 2017 Summary Rules expanded the coverage to include additional loans. Amended the requirements for assessing who is a “covered borrower” under the rule. Amended the disclosures requirements to be provided to covered borrowers. Prior rule only included closed-end payday loans with a term of 91 days or less, not exceeding $2,000 Closed-end auto loans with a term of 181 days or less and Closed-end tax refund anticipation loans. NOW – consistent with TILA coverage – credit offered for personal, family or household purpose subject to a finance charge or payable in a written agreement with more than 4 installments.

Does the MLA apply? Coverage of the MLA applies to a borrower who is determined to be “covered” at the time they become obligated on a credit transaction or established an account. There is no requirement to monitor “covered” status for loans, determination is made at the time of consummation. Credit union can periodically review database to determine if covered borrower retains status for protections. The credit union did not have to look backwards at the loans in portfolio to determine if a borrower was covered.

Who is a Covered Borrower? At the time the consumer becomes obligated…. Is a member of the armed forces, serving on active duty, active Guard or Reserve duty. Dependents of the above; spouse, child (under 21 or 23 if full time student or no age limit if there is a mental/physical incapacity); could also be a parent or in-law (if supported by servicemember); another adult in legal custody of the servicemember. Regulation cites the following USC 1072(2) – A, D, E or I (A) the spouse; (D) a child who— (i) has not attained the age of 21; (ii) has not attained the age of 23, is enrolled in a full-time course of study at an institution of higher learning approved by the administering Secretary and is, or was at the time of the member’s or former member’s death, in fact dependent on the member or former member for over one-half of the child’s support; or (iii) is incapable of self-support because of a mental or physical incapacity that occurs while a dependent of a member or former member under clause (i) or (ii) and is, or was at the time of the member’s or former member’s death, in fact dependent on the member or former member for over one-half of the child’s support; (E) a parent or parent-in-law who is, or was at the time of the member’s or former member’s death, in fact dependent on him for over one-half of his support and residing in his household; (I) an unmarried person who— (i) is placed in the legal custody of the member or former member as a result of an order of a court of competent jurisdiction in the United States (or possession of the United States) for a period of at least 12 consecutive months; (ii) either— (I) has not attained the age of 21; (II) has not attained the age of 23 and is enrolled in a full time course of study at an institution of higher learning approved by the administering Secretary; or (III) is incapable of self support because of a mental or physical incapacity that occurred while the person was considered a dependent of the member or former member under this subparagraph pursuant to subclause (I) or (II); (iii) is dependent on the member or former member for over one-half of the person’s support; (iv) resides with the member or former member unless separated by the necessity of military service or to receive institutional care as a result of disability or incapacitation or under such other circumstances as the administering Secretary may by regulation prescribe; and (v) is not a dependent of a member or a former member under any other subparagraph.

Safe Harbor – Covered Borrower Assessing a covered borrower from either the MLA database or a consumer report from a CRA. Credit union responsible for determining covered borrower status for borrower/co-borrower. Time periods for determination When member initiates transaction or 30 days prior; At application or 30 days prior; or 60 days from processing firm offer of credit. Credit union must retain documentation with the loan file. Not the borrower’s responsibility – it is now the credit union’s responsibility! When setting up overdraft lines of credit, need to have a process in place to determine if they are a covered borrower!

Not the borrower’s responsibility – it is now the credit union’s responsibility! When setting up overdraft lines of credit, need to have a process in place to determine if they are a covered borrower!

“Consumer Credit” – will now be generally consistent with Regulation Z; 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. Current scope did not effectively provide the protections needed. This is designed to close up the existing MLA loopholes. Used to only cover closed-end payday loans with a term of 91 days or less and less than $2,000; closed-end vehicle title loans with a term of 181 days or less; and closed-end tax refund anticipation loans. This expanded scope now touches credit unions! Where it maybe only touched their alternative payday loan product before.

Excluded Loans A residential mortgage (credit transaction secured by an interest in a dwelling – includes purchases, refinances, initial construction, home equity, HELOC or reverse mortgage). Any credit transaction intended to finance the purchase of a vehicle when the credit is secured by the vehicle being purchased. Any credit transaction intended to finance the purchase of personal property when the credit is secured by the property being purchased. Any credit transaction that is exempt under Regulation Z. Any credit transaction for a non-covered borrower (by using a method and complying with recordkeeping requirements outlined in the Act.

Loan Coverage Payday loans Vehicle title loans Refund anticipation loans Deposit advance loans Installment loans Unsecured open-end lines of credit Credit cards Refinance of an auto loan Refinance of a loan on personal property The regulation specifically excludes: “Credit expressly intended to finance the purchase of a motor vehicle when the credit is secured by the motor vehicle.” Same wording with the purchase of personal property. Transactions secured by residential mortgages and credit exempt by Reg Z is also excluded. This is going to include your overdraft lines of credit as well.

Cash out transactions Dealer purchases with negative equity become covered transactions under the MLA. “A hybrid purchase money and cash advance loan is not expressly intended to finance the purchase of property, because the loan provides additional financing that is unrelated to the purchase. Any credit transaction that provides purchase money secured financing with additional cash out is not eligible for the exemption and must comply with the provisions set forth in regulation.” The DOD’s guidance is clear that a loan that provides additional financing that is unrelated to the purchase loses its exemption.

Personal Property Definition of vehicle does not include motor homes, RVs, golf carts or motor scooters. Personal property – is defined under state law. Advice to credit unions is that the safest approach is to treat them as covered under the rule, unless they specifically seek counsel’s opinion for a particular loan type. The DOD’s guidance is clear that a loan that provides additional financing that is unrelated to the purchase loses its exemption.

Protections include: 36% MAPR limit (including all interest and fees associated with the loan). Prohibition on certain requirements, mandatory arbitration, onerous legal notice requirements, waiving rights under the Servicemembers Civil Relief Act, are just a few. Changing the definition of credit to bring any closed and open-end loans within the scope of the regulation, except for loans secured by real estate or a purchase-money loan, including a loan to finance the purchase of a vehicle. Fees that are above and beyond the Reg Z calculation of a finance charge now need to be included in this calculation, such as ancillary products like payment protection, GAP on the refinance of an auto loan, application or participation fees. Fees that can be excluded are application fees charged for short term, small dollar loans if they follow the FCU guidelines (only one excluded in a rolling 12 month period) and for a credit card a “bona fide” fee charged to a credit card account.

Military Annual Percentage Rate (MAPR) Closed-end loans: The MAPR is calculated in the same way an APR is calculated under Regulation Z, including the fees described below: Open-end credit: Calculated the same as an APR under Regulation Z, including the fees described below: Credit insurance premium or fee; Debt cancellation or debt suspension fee; Fees for ancillary products sold in connection with the transaction (credit default insurance and debt suspension plans); Financial charges (except for a bona fide fee) Application fee (other than FCU for short term small dollar – can only charge once in any rolling 12 month period) Fees that are above and beyond the Reg Z calculation of a finance charge now need to be included in this calculation, such as ancillary products like payment protection, GAP on the refinance of an auto loan, application or participation fees. Fees that can be excluded are application fees charged for short term, small dollar loans if they follow the FCU guidelines (only one excluded in a rolling 12 month period) and for a credit card a “bona fide” fee charged to a credit card account. In order to have the application fee for the short term small dollar loan to be exemption you can only charge the application fee once in any rolling 12 month period!

Military Annual Percentage Rate (MAPR) Closed-end loans: Fees added after consummation, such as a skip-a-pay fee (or a late payment fee), do not need to be included in the MAPR calculation. Open-end loans: Fees are included in the calculation of the MAPR for the billing cycle in which the fee is charged to the member’s account or paid by the member. For closed end loans the addition of debt protection to an existing closed-end loan would not require recalculation of the MAPR. For open-end, it would require recalculation of the MAPR during the billing cycle in which the debt protection coverage is added.

Military Annual Percentage Rate (MAPR) Calculators! CUNA CUNA Mutual

Military Annual Percentage Rate (MAPR) Effective October 3, 2017 Bona Fide Fees for Credit Card Accounts (not home secured) Generally, a bona fide and reasonable fee, other than a periodic rate, is not required to be included in the MAPR calculation (applies only to the extend that the charge by the credit union is a bona fide fee and reasonable for that type of fee). Credit insurance premiums or fees and fees for ancillary products are not exempt and must be included in the MAPR calculation. The fees must be “reasonable”, meaning they would fairly allow servicemembers and their dependents to continue to have access to credit card products and limit the opportunity for a creditor to exploit the exclusion for those products.

Military Annual Percentage Rate (MAPR) Effective October 3, 2017 Bona Fide Fees for Credit Card Accounts (not home secured) Safe Harbor – a bona fide fee is “reasonable” if the amount of the fee is less than or equal to an average amount of a fee for the same or substantially similar products or services, charged by more than 5 creditors each of whose US credit cards in force is at least $3 billion in an outstanding balance at any time during the 3 year period preceding the time such average is computed. If one fee is “unreasonable,” all fees must be included in the MAPR calculation. Example: credit union charges the service member a fee for debt cancellation, a finance charge (under Reg Z), a bona fide foreign transaction fee that qualifies for the safe harbor and a bona fide, but unreasonable cash advance fee. ALL of the fees, including the foreign transaction fee that would otherwise be exempt must be included in the MAPR calculation.

Mandatory Loan Disclosures Information required to be provided to the covered borrower before they are obligated on the transaction. Statement of the MAPR applicable to the extension of credit (model statement); Any disclosures required under Reg Z (this exists now) A clear description of the payment obligation and a payment schedule or account opening disclosure provided pursuant to Reg Z (this exists now) Must be provided in writing and orally. However, oral requirement can be met by providing a toll-free number the borrower can use to call to receive the oral disclosures (on application or required disclosures listed above). New disclosures are required when a loan is refinanced or renewed. This is the same concept as Regulation Z generally. “modification” of a loan wouldn’t require disclosure.

Model Disclosure “Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36%. This rate must include, as applicable to the credit transaction or account: the costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).” How are you going to train your staff to handle any oral calls received from a covered borrower?

Oral Disclosure Requirement – Recorded Message? Oral disclosure of the covered borrower’s payment obligation can be generic. “A general oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.” EXAMPLE ONLY – Instruct credit unions to consult with Legal: “If your APR is XX% and your loan term is 5 years, your payment will be $XX.XX for every $1,000 you borrow. Details of your specific payment obligations will be disclosed in your loan documentation.” This will be different for closed and open end loans. Consult with your counsel to make sure they are comfortable with this approach.

Cross Collateralization / Statutory Lien For covered loans under the MLA, credit unions are only permitted to take a security interest in funds deposited after the extension of credit in an account established in connection with the loan. For collection action – consult with an attorney on loans covered under the MLA. At this time, without further guidance it doesn’t appear permissible to take funds from an account contrary to the above. Loan agreements with cross collateralization clauses should be reviewed. Statutory lien and right of offset is permissible, but only in funds deposited after the extension of credit in an account established in connection with the transaction.

Contracts Exercising a statutory right to take a security interest in funds on deposit is permissible under the MLA. Existing loan documents with prohibited terms such as mandatory arbitration can be used, as long as the clause limits the applicability of those terms to only non-covered borrowers, consistent with applicable law.

Share Secured Loans Order of operations will be important in compliance with this rule. Funds have to be deposited after the extension of credit. Account must be a separate account that the credit union establishes in connection with the transaction. Statutory lien and right of offset is permissible, but only in funds deposited after the extension of credit in an account established in connection with the transaction.

MLA Examinations CFPB issued examination procedures for the MLA. NCUA Letter 16-CU-07 NCUA intends to accept a credit union’s reasonable and good faith efforts to comply with the new rule during the first examination following the implementation date. Ensure credit union is aware of amendments and determining applicability; Credit union is making progress in comply with the rule; and NCUA will assess the quality of the credit union’s compliance risk management systems and policies and procedures for implementing the program. Does not shield a credit union from third-party liability that can arise under the MLA.

Compliance Connection - YouTube

Servicemembers’ Civil Relief Act (SCRA)

SCRA Servicemembers Civil Relief Act (SCRA)
Originally enacted in 1940 (Soldiers’ and Sailors’ Civil Relief Act – SSCRA)). In 2003, Servicemembers Civil Relief Act was signed to restate, clarify and revise the SSCRA. No federal regulator designated by Congress to develop rules or guidelines for credit unions to use. Technical law, still may prove challenges for interpretation and implementation.

SCRA Coverage The SCRA applies to the member when:
The member is in the military service of the US. The member is on active duty. The member is materially affected or disadvantaged as a result of going on active duty.

SCRA Active Duty Army, Navy, Air Force, Marines, or Coast Guard - full time duty in the active military service. Reporting for basic training. Full time training – boot camp, advanced training, etc. National Guard – includes service under a call to active service authorized by the President or Secretary of Defense for a period of more than 30 consecutive days for purposes of responding to a national emergency.

SCRA Dependent Coverage
Protections include termination of leases, foreclosure or seizure of real property or repossession of personal property (not the 6% interest rate, unless servicemember is also obligated or the dependent applies for relief through the court). Spouse Child; or An individual for whom the servicemember provided more than one-half of the individuals support for 180 days immediately preceding an application for relief.

Interest Rate Limitation
SCRA Interest Rate Limitation For loans that are incurred prior to active duty, the credit union may not charge more than a 6% interest rate during active duty. For mortgage loans, the 6% interest rate cap extends for 1 year beyond the period of military service. Interest Rate Limitation - Exemptions Does not apply to new advances on existing plans, even if established prior to active duty. Does not apply to new loans consummated during active duty. Does not apply to loans granted under the Guaranteed Student Loan Program.

Servicemember’s Obligation
SCRA Servicemember’s Obligation The servicemember is required to provide the credit union with a written notice and a copy of military orders calling them to active duty, as well as any orders further extending military service. Notice must be provided 180 days after the date of the servicemember’s termination or release from military service. Credit union must reduce the interest rate on any debt incurred prior to active duty as of the date on which the servicemember was called to service. Can then reinstate the rate when the member is no longer on active duty, but must provide the Reg Z advanced notice – 45 days prior to the change.

Mortgage Protections SCRA
If the court determines that the servicemember has been materially affected, it may stay the foreclosure proceedings or adjust the obligation to preserve the interests of all of the parties. The credit union will have to obtain a court order approving the sale, foreclosure or seizure of real estate if it occurs during the servicemember’s military service or within 90 days after military service ends. If you happen to be renting a property to a servicemember because you own a foreclosure, etc, there are certain protections and procedures that must be followed for eviction situations. Servicemembers also have the capability of terminating a lease. There are additional requirements for those credit unions who currently conducting leasing.

MLA / SCRA Considerations

MLA / SCRA Coverage Under the SCRA, the member notifies the credit union of their active duty. Under the SCRA, changes will be made to loans consummated prior to active duty. Under the MLA, the credit union must determine a covered borrower. Under the MLA, there is no “lookback.” Determination of coverage is made during consummation.

MLA / SCRA Interest Rate
Under the SCRA, 6% interest rate only applies to debts incurred prior to active duty. SCRA relief ends when the member returns from active duty (or for mortgage related debt, 12 months following their return). Under the MLA, the 36% MAPR limitation is for the life of the loan and determined at the time of consummation.

MLA / SCRA Dependents Under the SCRA, generally, unless they are a joint obligor on a loan, dependents are not entitled to receive the reduced rates. The SCRA protections are also provided to servicemembers in the foreclosure process. Under the MLA, dependents are defined differently and the protections under the Act also apply to them.

MLA / SCRA Loan Coverage
Under the MLA, there is a more limited loan coverage scope. Under the SCRA, coverage applies to open end (credit cards and HELOCs) and closed-end loans (mortgages, auto, signature, etc.).

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Military Lending Act (MLA)

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Military Lending Act (MLA)

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