The Military Lending Act (MLA) has traditionally applied to three (3) types of loan products: payday loans, vehicle title loans, and refund anticipation loans. Under the Final Rule, beginning October 3, 2016, the MLA will apply to products generally covered by the Truth in Lending Act and Regulation Z, including deposit advance loans, installment loans, unsecured open-end lines of credit and credit cards. The Final Rule covers consumer credit extended to a “covered borrower” that is subject to a finance charge with more than four (4) installments. Credit products that are exempted from the rule include loans to purchase or refinance a home, home equity lines of credit, auto finance loans where the loan is secured by the vehicle and commercial transactions.

A “covered borrower” is a borrower who, at the time credit is extended, is a member of the military on active duty, or the dependent of an active duty military member. Under the Final Rule, creditors are granted a safe harbor in identifying a covered person if they rely on either: (i) information from the DOD’s MLA Website database or (ii) information in a consumer report from a nationwide consumer credit reporting agency meeting certain criteria. Creditors cannot rely on a borrower’s self-reporting if they want the protection of the safe harbor.

A creditor can rely on an initial “covered borrower” determination made: (i) when a member initiates the transaction or thirty (30) days prior; (ii) when a member applies to establish an account or thirty (30) days prior; or (iii) when the creditor develops or processes a firm offer of credit and the covered borrower responds within sixty (60) days. If the covered borrower does not respond within sixty (60) days, a new “covered borrower” determination must be made. Creditors aren’t required to monitor whether the member’s military status during the course of the relationship; however, a creditor must re-verify a member’s covered borrower status for each new loan.

The Final Rule establishes a cap of 36% on interest, the Military Annual Percentage Rate (MAPR), which may be charged to a covered borrower and their families. The MAPR is a one-time calculation for closed-end credit, made either prior to or at the time the loan is made. For open-end credit products, the MAPR must be calculated each billing cycle. The MAPR covers all interest and fees associated with the loan, including add-on products such as credit default insurance, debt suspension plans, credit insurance premiums, finance charges, debt cancellation fees, credit-related ancillary products, and certain application and participation fees.

For credit card products, creditors can exclude finance charges (aside from interest), application fees, and participation fees from the MAPR calculation if such fees are “bona fide” and “reasonable.” To determine “reasonableness,” the Final Rule requires creditors to compare fees typically imposed by other creditors for the same or substantially similar product or service. To obtain a safe harbor for this exclusion, a creditor must compare their bona fide fee to the average amount charged by five (5) or more creditors who have at least $3 billion in outstanding credit card balances during a three-year look back period. The fee will be “reasonable” if it is equal to or less than the average amount.

Creditors are required to provide covered borrowers with three types of disclosures informing them of their rights under the MLA before or at the time the borrower becomes obligated for a transaction or when the account is originally established. In addition to Regulation Z disclosures, a creditor must also provide a statement of the MAPR that describes the charges the creditor may impose. A creditor must also provide a clear description of the covered borrower’s payment obligation, which can be satisfied by providing the Regulation Z payment disclosures for closed-end loans and the account-opening disclosures for open-end accounts.

To satisfy the disclosure requirement, a creditor may use the model statement below or a substantially similar statement.

“Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: the costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).”

The MAPR statement disclosure as well as the payment obligation disclosures must also be given to the covered borrower orally. This can be done either in-person or by providing a toll-free number to the borrower to call to receive the information.The Final Rule prohibits creditors from requiring covered borrowers to submit to mandatory arbitration, waive their rights under the Service Members’ Civil Relief Act, or provide a payroll allotment as a condition of obtaining credit. Rule violations can result in both civil liability and administrative enforcement.