With all the focus on HMDA and the Prepaid Rule it is easy to lose sight of the Military Lending Act (MLA). We get a lot of questions on the MLA and we will address many of them in an upcoming article but this week we are going to talk about something that hasn’t gotten much attention thus far, the MLA’s credit card provisions. Right now, credit cards are exempt from the MLA. Unless Secretary Mattis extends the exemption for another year, beginning October 3, 2017, the MLA will begin to apply to credit card accounts. And with it comes a few new wrinkles that you need to be ready to handle.
For open-end credit, including credit cards, you calculate the MAPR using Regulation Z’s methods for the effective APR using the MAPR fees. Even a very modest fee can cause the MAPR to exceed 36%. For example, a credit card with a $500 balance, an 8.25% APR, and a $25 annual participation fee will have an MAPR of almost 70%. As the balance gets lower the MAPR gets exponentially higher. Most creditors avoid this by waiving all fees on covered personal lines of credit so the MAPR is essentially the same as the effective APR. I don’t know about you, but I’d rather not issue a credit card then have to waive all fees. Fortunately, the Department of Defense realized this and provided a couple of exclusions that will allow you to continue to charge certain fees on your credit cards.
The first exclusion applies when there is no balance on the account. This exclusion is already in effect, but because most creditors find it easier to waive all fees on personal lines of credit, it hasn’t been discussed much. Now that credit cards are coming online, it’s time to dust it off. You are generally prohibited from imposing a charge that would be included in the MAPR for any billing cycle during which there is no balance. However, you may charge a participation fee (and exclude it from the MAPR calculation) of up to $100 per year, regardless of the billing cycle in which the participation fee is imposed. This exclusion only applies when there is no balance on the account. If there is a balance on the account, any participation fee must be included in the MAPR calculation unless it meets the exclusion described below.
The second exclusion is the reasonable and bona fide fee exclusion. This exclusion allows you to exclude from the MAPR your reasonable and bona fide fees. This exclusion only applies to credit card accounts and does not apply to the periodic rate or any fees for credit insurance or credit-related ancillary products. To exclude the fees from the MAPR, you need to confirm that your fees are reasonable and bona fide; any fee that is not reasonable and bona fide must be included in the MAPR. You must compare fees to fees typically imposed by other creditors for the same or a substantially similar product or service.
The MLA includes a safe harbor for determining whether a fee is reasonable. To apply the safe harbor, you select a group of five or more credit card issuers who each have $3 billion in credit card loans at any time during the preceding three years. If your fee is less than or equal to the average of the amount charged by those five plus credit card issuers, your bona fide fee is reasonable. If your fee is greater than the safe harbor amount, it may still be reasonable. A fee may be reasonable if that amount reasonably corresponds to the credit limit in effect or credit made available when the fee is imposed, to the services offered under the credit card account, or to other factors relating to the credit card account. For example, you may offer a credit card that carries a relatively higher participation fee but does not charge a foreign transaction fee. In this example, it may be reasonable to charge a higher participation fee while not charging a foreign transaction fee because service members are often deployed or stationed overseas.
To determine average fees, you can use the Consumer Financial Protection Bureau (CFPB) Credit Card Agreement Database or the company’s website. To determine a company’s credit card portfolio size, you can use the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system or call reports from FFIEC’s website or the NCUA’s website. You may also rely upon industry-specific databases containing data collected from these and other information sources regularly used by financial institutions to track the marketplace for credit card products and services. Don’t forget, document everything.
Most of the time you can estimate whether charges to a covered borrower can produce an MAPR in excess of the 36% limit because you already know the periodic rate and whether the non-periodic fees are covered by an exclusion. When you have fees that are not excluded, you will need to calculate the MAPR each billing cycle and you will need to waive any amount of MAPR charges necessary to comply with the 36% limit.
You should now be armed with the information you need to charge forward in implementing the MLA with your credit card portfolio.