The Federal Deposit Insurance Corp. (FDIC) issued a letter to financial institutions about changes to the Military Lending Act rule, which the Department of Defense recently finalized.
FDIC-supervised institutions and other creditors must comply with the rule for new covered transactions beginning Oct. 3, 2016. For credit extended in a new credit card account under an open-end consumer credit plan, compliance is required beginning Oct. 3, 2017.
The final rule expands specific protections provided to service members and their families under the MLA and addresses a wider range of credit products than the previous regulation, the FDIC’s letter stated.
The MLA caps the Military Annual Percentage Rate (MAPR) on covered transactions at 36 percent, requires disclosures to alert servicemembers and their dependents of their rights and prohibits creditors from requiring arbitration in the event of a dispute, among many other protections.
The letter highlighted a few parts of the final rule for institutions, including:
- The rule defines “consumer credit” consistently with credit that is subject to the protections of the Truth in Lending Act (TILA) Under the final rule, MLA protections apply to any “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.” As a result, the final rule applies to all forms of vehicle title loans, installment loans, unsecured open-end lines of credit, payday loans, refund anticipation loans, credit cards and deposit advance loans. The final rule also mandates that finance charges and other charges covered as interest under the MLA be included in the 36 percent MAPR. In the case of the MLA, that includes: Credit insurance premiums and fees for debt cancellation or debt suspension agreements, fees for credit-related ancillary products sold in connection with the credit transaction or account, finance charges associated with the consumer credit and certain application fees and participation fees, including annual fees.
- The rule extends MLA protections to a wider range of credit products, including credit cards, but excludes from the calculation of the MAPR certain credit card fees that are bona fide and reasonable for that type of fee. A credit card issuer can continue to charge a periodic interest rate of up to the 36 percent limit under the MLA cap, plus one or more additional fees that carry reasonable costs tied to specific products or services. The provisions related to credit cards are effective Oct. 3, 2017.
- The rule permits creditors to use two methods to ascertain whether a consumer is a covered borrower for purposes of the regulation’s protections. Creditors are granted a safe harbor if they use either or both of the two methods — the MLA database or consumer reports from a nationwide consumer credit reporting agency — to verify borrower status and comply with recordkeeping requirements. Creditors are allowed to rely on the initial covered borrower check for up to 60 days after a firm offer of credit is extended to the borrower.
- The rule modifies the existing rule on rolling over, renewing or refinancing consumer credit. In particular, the final rule prohibits all rollovers, renewals or refinances of payday loan transactions or other deferred presentment transactions by creditors other than banks, thrifts or credit unions.
- The rule modifies the disclosures that a creditor must provide to a covered borrower to be consistent with TILA. A creditor must provide a “statement of the MAPR” applicable to the extension of consumer credit, any disclosures required by Regulation Z and a clear description of the payment obligation of the covered borrower.
- The rule prohibits mandatory arbitration clauses and other abusive practices.
- The rule subjects creditors to civil liability and administrative enforcement for MLA violations.