The Department of Defense (DoD) dramatically expanded the scope of the Military Lending Act (MLA) on July 22, 2015, publishing its Final Rule amending the MLA’s implementing regulation.

MLA coverage was previously limited to only three types of consumer credit extended to active-duty service members and their dependents: closed-end payday loans with a term of 91 days or less in which the amount financed does not exceed $2,000, closed-end vehicle title loans with a term of 181 days or less, and closed-end tax refund anticipation loans. The Final Rule extends the MLA’s 36 percent interest cap and other restrictions to a host of additional products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act, and all types of deposit advance, refund anticipation, vehicle title, and payday loans (residential mortgages and purchase-money personal property loans are excluded). Although the Final Rule takes effect on October 1, 2015, it will apply only to consumer credit transactions or accounts that are consummated or established after October 3, 2016 for most products, and after October 3, 2017 for credit cards.

As noted in our alert on the proposed rule, the MLA since 2007 has prohibited lenders on covered products from charging interest in excess of 36 percent, assessing prepayment penalties, or requiring arbitration of disputes for active-duty service members and their dependents. It also requires certain additional disclosures at the inception of a transaction. In addition to extending these rules to a host of new products, the Final Rule adds additional restrictions and creates new risks for lenders.

Perhaps most significantly, the Final Rule indirectly imposes severe limits, if not an effective ban, on the sale of “add-on” products such as credit insurance, debt suspension, and debt cancellation contracts to active-duty service members and their dependents. Although the Final Rule does not expressly prohibit selling these products, it requires their cost to be included in the Military Annual Percentage Rate (MAPR) calculation, which is limited to 36 percent, despite the fact that the cost would not be included in an APR calculation under Regulation Z.

Because few, if any, of these products can be purchased without driving the MAPR above the 36 percent limit, the Final Rule appears to be an indirect ban on selling most “add-on” products, which clearly are disfavored by the current administration.  Indeed, in describing the Final Rule’s treatment of these products, DoD acknowledged its dislike for them, expressing the view that “most, if not all, of the credit insurance products, debt cancellation contracts, or debt suspension agreements customarily offered to consumers are not suitable for a covered borrower because the military services already provide insurance or other benefits... that would adequately provide financial resources even if an event of coverage (e.g., disability) were to occur to the borrower.” DoD also stated that fees for add-on products sold after inception of an open-end credit account must be included in the MAPR calculation for each billing cycle, making it difficult if not impossible for a covered borrower to take advantage of these products at any time.

The Final Rule also establishes some additional differences between the calculation of a MAPR, and the calculation of an APR under Regulation Z. In particular, the MAPR includes application fees charged by lenders (other than by federal credit unions and insured depository institutions for short-term, small amount loans subject to certain conditions), and participation fees charged by any lender. (A participation fee is any fee, such as an annual fee, imposed for participation in any plan or arrangement for consumer credit.)

However, the MAPR excludes “bona fide” fees charged to credit card accounts, provided they are reasonable. The “bona fide” fees exclusion applies to any fees other than fees for “add-on” products such as credit insurance, and debt suspension, and debt cancellation contracts. Thus, the fees that can be excluded as “bona fide” include application fees, annual fees and cash advance fees. Reasonableness is determined by comparison to fees “typically imposed by other creditors for the same or a substantially similar service.” There is a safe harbor for reasonableness which applies to fees in amounts less than or equal to the amount of similar fees charged by five or more creditors with at least $3 billion in aggregate balances in the United States at any time within three years of the time when the average is calculated.

Unlike the proposed rule, the Final Rule does not require lenders to use any particular method for ascertaining whether an applicant is a covered borrower. However, there is a safe harbor for lenders who do so using either the DoD’s online database or a consumer report from a nationwide consumer reporting agency.

Compliance with the Final Rule will be important because the MLA contains serious penalties and remedies. Agreements that violate the MLA are void from inception, and knowing violations constitute a misdemeanor. Private plaintiffs may recover actual damages of not less than $500 per violation, plus punitive damages, attorneys’ fees, and other remedies.

Administrative enforcement also is permitted by the CFPB or the FTC, depending on which agency has Truth in Lending Act jurisdiction over the lender. There is, however, a bona fide error defense.

Although the Final Rule is being hailed by the administration and the CFPB as a win for service members, it actually is a series of price controls which necessarily will restrict the availability of credit, including mainstream credit, for service members and their dependents. It also will impose significant compliance costs on the industry, further impeding the ability of lenders to serve this critically important segment of our society.