United States

DoD issues final rule expanding the Military Lending Act


The Department of Defense (DoD) issued a final rule expanding the coverage of the Military Lending Act (MLA). Historically, the MLA defined consumer credit as three types of loans–payday loans (loans for $2,000 or less, with a term of 91 days or fewer), vehicle title loans and tax refund anticipation loans. Historically, many financial institutions did not offer these loan products and so were not concerned with the requirements of the MLA. All of that is about to change.

The most significant change to the MLA is the expansion of the definition of consumer credit. Consumer credit is now defined as "credit offered or extended to a covered borrower primarily for personal, family or household purposes, and that is: (i) subject to a finance charge; or (ii) payable by a written agreement in more than four installments." Although this definition sounds eerily similar to consumer credit as defined under Regulation Z, there are five exemptions which differentiate the coverage of the MLA from that of Reg Z. The following loan types are exempt from MLA coverage:

  • A residential mortgage defined as any credit transaction secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling, any refinance transaction, home equity loan or line of credit, or reverse mortgage
  • A credit transaction expressly intended to finance the purchase of a motor vehicle which is secured by the vehicle being purchased
  • A credit transaction expressly intended to finance the purchase of personal property which is secured by the property being purchased
  • A credit transaction exempt from Reg Z or not subject to the disclosure requirements of Reg Z
  • A credit transaction not extended to a covered borrower  (32 CFR 232.3(f))

Under the MLA, a creditor may not charge a Military Annual Percentage Rate (MAPR) greater than 36 percent on a covered loan. The MAPR is the cost of consumer credit, like the APR under Reg Z, but it is calculated differently. In addition to the finance charge under Reg Z, the MAPR includes:

  • Credit insurance premiums (including single premium) and fees for debt cancellation contracts or debt suspension agreements
  • Fees for credit-related ancillary products sold in connection with the credit
  • Specified application and participation fees that are not bona fide fees (32 CFR 232.4(b))

The MLA only applies to extensions of credit to a covered borrower.  A covered borrower is "a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit is a covered member [a member of the armed forces who is serving on active duty in the Army, Navy, Marine Corps, Air Force, Coast Guard or National Guard under a call or order that does not specify a period of 30 days or fewer, or Active Guard and Reserve duty] or a dependent [basically the spouse, child, parent, parent-in-law or unmarried person in the member’s legal custody] of a covered member."  (32 CFR 232.3(g))

The MLA requires three types of disclosures to be delivered to a covered borrower:

  • A statement of the MAPR applicable to the extension of consumer credit
  • Any disclosure required by Reg Z, provided in accordance with the requirements of Reg Z that apply to that loan
  • A clear description of the payment obligation of the covered borrower (32 CFR 232.6(a))

Under the final rule, it continues to be critical to identify those consumers that are covered borrowers.  Creditors may use their own methods to determine which consumers are covered borrowers; however, the final rule introduces a safe harbor method to make this determination. Under the safe harbor, creditors may verify a consumer’s status by using the DoD database, or by using a statement, code or similar indicator describing that status, if any, from a consumer reporting agency or reseller of consumer reports. 

The effective date of the final rule is Oct. 1, 2015; however, mandatory compliance is not until Oct. 3, 2016.  The existing rules and safe harbor remain in effect until Oct. 3, 2016, when the expanded coverage becomes mandatory and the safe harbor requirements change. Lastly, there is a limited exemption for credit card accounts, delaying mandatory compliance with the final rule for those accounts until Oct. 3, 2017.

If institutions have not already been required to comply with the MLA because of its limited coverage, they most likely will have to now. Remember, there are two sets of requirements that must be kept in mind when lending to members of the Armed Forces–the Military Lending Act and the Servicemember’s Civil Relief Act.