The Department of Defense (DoD) has issued a proposal to revise and significantly expand the coverage of its rule implementing the Military Lending Act (MLA). The proposed revisions would limit interest charged to servicemembers and their dependents on all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards—a drastic expansion of the types of credit currently subject to the rule—and would require creditors to screen all applicants against a DoD database before offering such products with rates greater than 36 percent as defined by the rule.
If adopted, the rule would increase significantly the regulatory and litigation risks that lenders face. Following amendments to the MLA in 2013, actions to enforce MLA violations may be brought by federal regulators and private litigants.
The MLA rule, in effect since 2007, provides protections to a consumer who is a servicemember or the dependent of a servicemember at the time he or she becomes obligated on certain types of consumer credit transactions. These include limiting interest to 36 percent, prohibiting arbitration and prepayment penalties, and requiring delivery of special disclosures before consummation of the transaction (including oral disclosures, which in certain instances may be satisfied by providing a toll-free telephone number the consumer may call to receive the disclosures).
The DoD’s major proposed changes include expanding the types of credit subject to the rule, requiring creditors to use a DoD database to confirm an applicant’s nonmilitary status to obtain a safe harbor from the requirements of the rule, and amending the types of charges considered interest subject to the interest rate cap. Comments on the proposed rule are due November 28, 2014.
In its current form, the rule covers only three types of consumer credit: 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 DoD proposes to extend the rule to cover the types of credit that are subject to the Truth in Lending Act (TILA) except for credit specifically excluded by the MLA, such as loans secured by real estate and purchase-money loans (including auto loans). By modifying the definition of “consumer credit,” the proposal is designed to cover all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit (including overdraft lines of credit), and credit cards.
Although the proposed rule reaches credit cards, the DoD has proposed exempting certain “bona fide” credit card fees from the rule’s 36 percent “military annual percentage rate” cap, or MAPR. Any bona fide fee charged to a credit card account is not required to be included in the MAPR as long as the fee is “reasonable and customary” as defined in the regulation.
The proposal also would change the way that creditors qualify for the safe harbor from liability under the MLA. It would require creditors to determine that a consumer is not a “covered borrower” under the rule by accessing the DoD’s existing, publicly available online database of servicemembers and their dependents at the time the consumer applies for a new consumer credit product or establishes a new account for consumer credit. In proposing this requirement, the DoD explained that existing safe harbor procedures (whereby the borrower completes a “covered borrower identification statement” declaring whether he or she is a servicemember or a dependent of servicemember) cause a small number of borrowers to lose the MLA’s protections because they fail to disclose their statuses intentionally or by mistake. The proposed rule states that the creditor is not entitled to a safe harbor if it has actual knowledge that a consumer is a covered borrower despite contrary information in the DoD database.
The proposed rule implements several provisions added to the MLA by the 2013 Defense Authorization Bill. The MLA was amended in 2013 to give enforcement authority to federal regulators that tracks their TILA enforcement authority. This means that the Consumer Financial Protection Bureau has primary MLA enforcement authority concerning large banks and shares enforcement authority with the Federal Trade Commission concerning nonbank lenders. The law also added a civil liability provision that allows private actions for MLA violations to be filed in federal court.
