Regulatory Alert Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department

March 2016

16-RA-04 Guidance on Regulatory Changes Affecting Military Members

NCUA issued Regulatory Alert 16-RA-04 to assist credit unions with compliance with U.S. Department of Defense’s (DOD) rule changes for the Military Lending Act (MLA). The guidance includes an enclosure containing a detailed discussion of the MLA changes. The changes to the MLA take effect October 3, 2016. Changes to provisions related to credit cards take effect October 3, 2017.

The DOD amended the MLA to extend coverage to include many non-mortgage related consumer credit transactions covered by TILA and Regulation Z, including credit card accounts and NCUA’s payday alternative loans (PALs). Key provisions include:

  • Maximum “military annual percentage rate” (MAPR) of 36% for credit extended to Service members and their dependents. The calculation of the MAPR includes application fees and other fees not counted as finance charges under TILA and Regulation Z.
  • PALs program is allowed because the final rule excludes any application fees imposed in connection with a short-term, small amount loan extended under certain conditions. The exclusion applies once in a rolling 12-month period.
  • A safe harbor is created under the final rule if the lender checks the borrower against the DOD’s Defense Manpower Data Center’s (DMDC) database or from a qualifying nationwide consumer reporting agency record.
  • The final rule prohibits using allotments to repay credit; pre-dispute mandatory arbitration agreements; requiring waivers of Servicemembers Civil Relief Act protections; and using burdensome legal notice requirements.

A person who violates the MLA is civilly liable for any actual damages, with a $500 minimum per violation; “appropriate” punitive damages; “appropriate” equitable or declaratory relief; and any other relief provided by law.

Covered Borrowers - “Covered borrower” includes full-time active duty Service members, full time National Guard members, military reserve, and dependents of the preceding.  

Credit unions may use their own method to identify covered borrowers. The rule provides a safe harbor for credit unions using information obtained either from the DMDC’s MLA webpage, or a nationwide consumer reporting agency

Covered Transactions – The final rule covers “consumer credit” which means:

  • 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 4 installments

Types of credit that may meet the definition of “consumer credit” include:

  • Credit card accounts
  • Installment loans and small dollar loans, including PALs
  • Overdraft lines of credit with finance charges

The final rule does not apply to:

  • residential mortgage transactions
  • transactions expressly for financing the purchase of a motor vehicle secured by the purchased vehicle
  • a transaction expressly for financing the purchase of personal property secured by the purchased property
  • credit transactions exempt for the purposes of Regulation Z
  • transactions involving non-covered borrowers

Creditors – The rule defines “creditor” as an entity or person (and their assignees) engaged in the business of extending consumer credit. A creditor is engaged in the business of extending consumer credit if the creditor meets the transaction standard for a creditor under Regulation Z.

Difference between APR and MAPR – The MAPR differs from the TILA and Regulation Z APR by including in its calculation:

  • any premium or fee for credit insurance, including any charge for single premium credit insurance
  • any fee for a debt cancellation contract or debt suspension agreement
  • any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit

The MAPR also includes the following fees, unless they are a “bona fide fee” excluded under special rules for credit card accounts:

  • finance charges, as defined by Regulation Z
  • any application fee charged to the covered borrower (except in connection with certain  short-term, small amount loans)
  • any participation fee, except as provided in special rules for certain open-end credits

“Bona fide fee” – Bona fide fees are exclude from the rule’s calculation of the MAPR for credit card accounts. Lenders may exclude certain fees from the MAPR calculation if they are reasonable when compared to fees from typically imposed by other creditors for similar products and services.

Payday Alternative Loans (PALs) - The Final Rule lets credit unions offering PALs exclude from the MAPR one application fee in a rolling 12-month period. These loans must have an APR limit comparable to the rule’s 36% limit, and must limited to a 9 month maximum maturity term. The regulation authorizing these loans must limit application fees.

Required Disclosures – Borrowers must be provided:

  • a statement of the MAPR applicable to the extension of credit
  • any required Regulation Z disclosures
  • a clear description of the payment obligation

Other Limitations and Restrictions – As noted above, the final rule also contains additional restrictions/protections for covered borrowers. Creditors are prohibited from:

  • requiring the covered borrower to waive right to legal recourse under any other state or federal law
  • requiring the covered borrower to submit to arbitration
  • demanding unreasonable notice from the borrower as a condition for legal action
  • requiring the covered borrower to establish an allotment to repay the obligation
  • prohibiting the covered borrower from prepaying the debt or charging prepayment penalties
  • using a check or other method to access an account**

** However, if the MAPR is 36% or lower, the creditor may (unless prohibited by other laws/regulations):

  • require an electronic fund transfer to repay the obligation
  • require direct deposit of salary as a condition of eligibility for credit, unless otherwise prohibited by law
  • take a security interest in funds deposited after the extension of credit in an account established in connection with the credit transaction

Enforcement - Knowingly violating the MLA or its implementing regulation is a misdemeanor punishable by imprisonment, fines, or both.