Last year, the Department of Defense (DOD) passed the Military Lending Act (MLA), with a compliance effective date of October 3, 2016 (save for credit cards, which have a reprieve until October 3, 2017). So, the clock is ticking.
Most credit unions and banks avoided John Warner loans, but, under the MLA, most will no longer be able to avoid making covered loans due to the expansion of the definition of “consumer credit.” Consumer credit is much more broadly defined under the Military Lending Act. “Consumer credit” means any 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 written agreement in more than four installments. In other words, all forms of vehicle title loans, installment loans, unsecured open-end LOCs, payday loans, refund anticipation loans, credit cards and deposit advance products.
There are three key exemptions:
- residential mortgage loans;
- loans to purchase a motor vehicle which are secured by the vehicle purchased; and
- loans to purchase personal property secured by the property purchased.
Have you identified which products you offer will be affected?
Next, the onus is on the financial institution to verify covered borrower status. No longer may you rely on a statement from the borrower to ensure compliance. Although there is no restriction on what method a creditor employs to verify covered borrower status, safe harbor provisions are afforded creditors under MLA. To conclusively determine whether credit is offered or extended to a covered borrower, a creditor may verify status of a consumer by using information relating to that consumer, if any, obtained directly or indirectly from the database maintained by the DOD (https://www.dmdc.osd.mil/mla/welcome.xhtml) or by using a statement, code, or similar indicator describing that status, if any, contained in a consumer report obtained from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis, or a reseller of such a consumer report. A creditor may not “lookback” to determine whether or not a borrower was a covered borrower after the loan closed or line of credit was established.
Have you updated your policies and procedures to state how your institution will determine covered borrower status? Have you created a process for retaining records to prove compliance? Have you completed a risk assessment? Planned for updates to your monitoring and auditing for compliance under the new rule? If you use a third party consultant, what updates do they intend to implement? When will they begin testing your portfolio after the effective date?
The new MLA rule requires a mandatory disclosure of the Military Annual Percentage Rate (MAPR). The statement must include a statement of the MAPR, any disclosure required by Regulation Z, and a clear description of the payment obligation of the covered borrower, as applicable.
Have you prepared your notice? Will it be system generated? When will your vendor be ready for you to test the system?
The MAPR calculation includes more charges and fees as finance charges than that required in an APR calculation under Regulation Z. Have you identified your fees and charges that will be impacted? Will your software system be updated to accommodate? Will there be parameters that you can set to ensure all applicable fees and charges are included? Excluded? When will it be ready to test?
Other prohibitions under the MLA include waiver of the covered borrower’s right to legal recourse, mandatory arbitration, waiver of Servicemember Civil Relief Act rights, imposing unreasonable notice of legal action, prepayment prohibitions and penalties, and requirement to establish an allotment repay.
Have you consulted with legal counsel to review loan agreements? Have you developed training for lending staff to ensure understanding do’s and don’ts of the new rules? Will your system have parameters triggered if the borrower is flagged as a covered borrower to avoid inclusion of prohibited clauses? Does your lending staff understand that there is no avoiding compliance with the MLA rules?
Have you provided risk assessment results to the Board and senior management? Are internal controls and weaknesses being addressed to mitigate MLA non-compliance risk? Potential UDAAP risk? Have you considered fair lending risk? Military status is not a protected class, but any new credit process should be assessed for potential fair lending risk.
These are just a few suggestions to consider for your MLA readiness.