1. Military Lending Act Panel

2. Military Lending Act New Obligations and Compliance Risks
Nessa E. Feddis, American Bankers Association
Benjamin K. Olson, BuckleySandler
Todd M. Hill, Financial Services Roundtable

3. General Overview MLA Background Restrictions on certain consumer loans
Made to military personnel, spouses, dependents
36% “military” APR cap
Other prohibitions
Written and oral disclosers
Verification of military status through database or CRA

4. Background Passed October 17, 2006
Intended to remedy abusive practices associated with payday lending and certain other loans identified in DoD “Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents”

5. Background
Original amendment added on Senate floor only capped interest
Expanded in conference to address specific concerns related to prior report
Little public debate, no hearings, and no input from committees with jurisdiction or regulatory agencies with relevant expertise

6. Background Final rule: July 22, 2015
Mandatory effective date: October 3, 2016 (2017 for credit cards unless DoD changes)
Industry shortly thereafter approaches DoD for clarifications
August-November 2015: Industry develops issues list
December 8, 2015: Industry meets, as DoD directed, with banking agencies to discuss issues
March 15, 2016: Industry meets with DoD

7. Background
April 7, 2016: Industry submits recommendations for changes to regulation
April 15, 2016: Industry submits rationale and process for adopting an “interim final rule”
June 23, 2016: Industry and DoD meet
August 2, 2016: Industry and DoD meet
August 26, 2016: DoD publishes interpretive rule in Federal Register

8. When Does the MLA Rule Apply?
MLA Rule applies even when the rate does not exceed 36%
MLA Rule applies to:
Loans to a “covered borrower”
That are “consumer credit”

9. Who is a Covered Borrower?
Military personnel and their spouses and dependents
May rely on DoD database or CRA
“Covered borrower” is a “covered member” or a dependent of a covered member at the time the account is opened or the borrower becomes obligated on the loan
“Covered member” means a member of the armed forces serving on active duty under specified statutes
“Dependent” means a spouse, child under 21, dependent child in school under 23, incapacitated child, dependent parent or parent-in-law that resides in household, and certain person for whom the covered member is a legal custodian

10. What Loans are Covered? Consumer credit
Subject to a finance charge or payable by written agreement in more than 4 installments

11. Exclusions Covered Loans
Residential mortgages, i.e. secured by a dwelling
condos, mobile homes, boathouses
HELs
Purchase money loans that do not exceed purchase price
Loans (except student loans) greater than $54,600 (per Regulation Z threshold)

12. Examples of Covered Loans
Overdraft lines of credit (but not overdrafts)
Personal loans (open and closed-end)
Car and boat refinance
Credit cards
Student loans
Lot loans (requesting clarification from DoD)

13. Prohibitions in Covered Loans
36% “military APR” cap
All finance charges
Application and participation fees
Fees for “credit related ancillary products sold in connection with the credit transaction”
Credit insurance premiums or charge for single premium credit insurance
Fees for debt cancellation
Fees for debt suspension agreement

14. Prohibitions in Covered Loans
36% “military APR” cap
“Effective” APR for open-end credit such as overdraft lines of credit and credit cards
Because MAPR cannot exceed 36% in any billing cycle, systems must track and suppress fees
Zero balance rule:
If no MAPR can be calculated because no balance in billing cycle, no fee may be charged except “participation” fee not exceeding $100 per year (except bona fide credit card fee)
DoD clarified fees not included in MAPR may be charged and
Fixed minimum and other fees except transaction fees may be charged

15. Prohibitions in Covered Loans
36% MAPR cap: Special rule for credit cards
Exclusion from calculation bona fide fees that are reasonable
“Reasonable”
Fees “typically imposed by other creditors for the same or substantially similar product or service”
Safe harbor: assumed to be reasonable if fees are less than or equal to average fee for “substantially similar” product charged by 5 or more of creditors with more than $3 billion outstanding

16. Prohibitions in Covered Loans
Prohibition against creditor “use of a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower”
Means lender can’t accept a check or use automatic debit for payment
Effectively prohibits “liquid secured credit,” loans secured by bank account
In response to industry requests DoD clarified:
Covered borrowers may pay by check or recurring payments
Security interests are permitted in limited circumstances

17. Prohibitions in Covered Loans
Prepayment penalties
Arbitration “or other onerous legal notices provisions in the case of a dispute”
Demands of “unreasonable notice from the covered borrowers as a condition of legal action.”
Waivers of the right to legal recourse under any state or federal law including SCRA
Allotments to pay loan

18. Prohibitions in Covered Loans
What prohibitions do not apply to banks?
Prohibition against using the title of a vehicle as a security for a covered loan
Prohibition against refinancing or renewing covered credit by the same creditor with the proceeds of other consumer credit

19. Disclosure Requirements
Timing: “Before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit”
Content
Written Disclosures
Oral Disclosures
Statement of the MAPR
Not a numeric disclosure of MAPR value
Standard language provided X
Regulation Z disclosures
“Clear description of the payment obligation”
Closed-end payment schedule
Open-end account-opening disclosures

20. Disclosure Requirements
In response to industry requests DoD clarified:
Creditors may provide disclosures after account-opening for telephone transactions consistent with Regulation Z
“General descriptions” of the payment obligation, rather than the Regulation Z payment schedule or account-opening disclosure suffice

21. Military Status Determination
Bank may not rely on applicant statement
Safe harbor:
Use information “obtained directly or indirectly from the database maintained by the Department”
Use “statement…describing the status…contained in a consumer report obtained from a consumer reporting agency that compiles …files on consumers on a nationwide basis…”

22. Military Status Determination
When must the bank determine military status to enjoy the safe harbor?
When applicant applies to establish account or 30 days prior.
When applicant initiates a transaction or 30 days prior
When creditor develops or processes a “firm offer of credit” that includes status of the consumer so long as consumer responds to offer no later than 60 days after creditor provided offer.

23. Military Status Determination
Bank may check status after account is opened
Covered borrower excludes someone covered when account opened, but no longer covered
Regulation provides lenders may not obtain information from any DoD databased to “ascertain whether a consumer had been a covered borrower as of the date of that transaction or…as of the date that account was established.”
MLA database only has current information

24. Record Retention “Record of the information obtained”
Screen shot from DoD database
Copy of credit report
Retain for five years

25. Liability for Violations
Criminal penalties
Private right of action and civil liability
Arbitration unenforceable
Costs of the action
Regulation Z violation: A violation of Regulation Z involving any product covered by the regulation is also a violation of the MLA
Voidance of the contract
Requested that DoD clarify contract not void solely because it includes: (i) a prohibited provision that expressly excludes covered borrowers; or (ii) a disclosure fails to conform with the applicable timing, content, or format requirements

26. Compliance Options Deny the loan to covered borrowers
Conform the loan – may not be feasible or practical
Offer separate product for covered borrowers
Eliminate or do not develop product

27. Verification of Military Status
The final regulation prescribes two methods by which a creditor or lender can conduct covered borrower checks and obtain a safe harbor protection for doing so:
1) MLA Database: The Defense Manpower Data Center’s MLA database system can be used to conduct covered borrower searches. The database is active. These searches, much like how they are conducted via the SCRA database, require the following fields of data:
DOB
SSN
Last Name
2) Military status report via a national credit reporting agency (NCRA): Equifax, Experian and Transunion will be offering military status reports upon query for such information. The military status report will be provided with a credit report for a fee. Stand-alone military status reports will eventually be available for a fee, perhaps by 10/3.
Under 18 dependent data will not be available via a NCRA report.
This data can only be pulled from the database system via a direct web service connection, a direct query to the MLA database or via a request, for an additional fee, through a NCRA.

28. Verification of Military Status
A very limited third option is available for conducting covered borrower checks via a “direct web service” connection to the MLA database system
15 enterprises, mostly financial institutions, have been granted direct web service connections with three additional direct web service connections allocated to the three NCRAs to conduct under 18 dependent searches. Experian and TransUnion have established their direct connections with DMDC. Equifax has not.
NOTE: Self-Identification via a covered borrower statement, as currently prescribed by MLA, expires under the new regulation on October 3, Lenders and creditors “may elect” to use either of the prescribed methods for conducting a covered-borrower check to determine military status of customers and their dependents. The prescribed methods are those outlined in this presentation and outlined in the final regulation.

29. Verification of Military Status

30. Verification of Military Status
NCRA Testing and MLA Solution Rollout Milestones:
Each NCRA (Equifax, Experian and Transunion) is allowing for financial institutions to test with both non-real data and real-data from DMDC today. Below are the current NCRA MLA solution production timelines:
EQUIFAX
Currently offering a testing environment
Phase 1 of MLA solution is released
Targeting mid-Sept. for Phase 2 launch
EXPERIAN
Phase 1 of MLA solution will launch on Sept. 9
Phase 2 launch is undetermined but likely after Oct. 3
TRANSUNION
Phase 1 of MLA solution will launch on Sept. 1

31. Verification of Military Status
Current State of Play:
Industry technical implementation efforts are behind schedule due to prolonged contract negotiations between DoD and the NCRAs on the “push model.”
Contracts were consummated between DoD and the NCRAs only in mid-July after being projected to be completed in February of this year.
Industry technical implementation timelines are dramatically condensed because of prolonged contract negotiations between DoD and the NCRAs, at great risk to the industry and to DoD, in order to meet the Oct. 3 compliance effective date.
Condensed UAT and IT testing schedules.
Condensed training and education schedules across impacted business lines and with industry vendors.
Industry vendor solutions are behind schedule, if a solution has even been developed by some vendors.
Direct web service connectivity efforts are underway again after being halted due to prolonged contract negotiations between DoD and the NCRAs on the “push model.”
Unlikely that financial institutions granted a direct web service connection will have that connection available by the Oct. 3 compliance effective date.

32. Questions?