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Military Lending Act Compliance

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Use of these materials by participants, including video and audio recording of this presentation, is strictly prohibited except by written permission of the FFIEC or its members1. The views expressed in this presentation are individual views, intended for informational purposes, and are not formal opinions of, nor binding on, the FFIEC or its members. 1Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, National Credit Union Administration, and State Liaison Committee.

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The Statute: 10 U.S.C. § 987 • Scope: The statute covers all “consumer credit” as

defined by Department of Defense (DoD) regulations • Substance: Imposes the following protections on

“consumer credit” extended to active duty servicemembers and their covered dependents:

- A price limit of 36%, including all interest, fees, charges, premiums for credit insurance products, and fees and charges for ancillary products sold in connection with the credit transaction (Military Annual Percentage Rate)

- Prohibits mandatory arbitration - Additional disclosures and limitations - Violating contracts are void from inception

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January 2013 Statutory Amendments

• Revised definition of “dependent” • Enforcement

• Specifically provided a private cause of action • Gave administrative enforcement authority to the

CFPB, FDIC, FRB, FTC, NCUA, and OCC • Regular consultation on implementation

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MLA Implementing Regulation

• Implemented by the Department of Defense • Consultation with the CFPB, FDIC, FRB, FTC,

NCUA, OCC, and Treasury • 32 CFR Part 232

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2007 Regulations • DoD narrowly defined “consumer credit” to

include three financial products: • “Payday loans” with the following characteristics:

• Closed-end • Duration of 91 days or less • Amount financed of no more than $2,000 • Post-dated check or preauthorized ACH

• “Vehicle title loans” with the following characteristics: • Closed-end • Duration of 181 days or less • Secured by the title on a motor vehicle owned by a covered

borrower • Tax refund anticipation loans

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2007 Regulations

• Identification of Servicemembers: • General safe harbor from liability for self-

certification by servicemembers and their dependents

• “I AM NOT a regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer (or a dependent of such a member).”

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Amending the MLA Regulation

• June 2013 – DoD published an Advance Notice of Proposed Rulemaking for public comment in the Federal Register.

• Interagency consultations. • September 2014 – DoD published a Notice of

Proposed Rulemaking for public comment in the Federal Register.

• Interagency consultations. • July 2015 – DoD published amended Final Rule. • August 2016 – DoD published Interpretive Rule.

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Timeline

October 1, 2015: New final rule took effect October 3, 2016: Compliance date for most provisions October 3, 2017: Compliance date for credit card accounts

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New Final Rule Under the MLA

• Key features of the July 2015 Final Rule: • Scope • Calculation of MAPR • Identification of covered borrowers • Required disclosures

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Final Rule: Scope “Consumer Credit” • 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.

• Examples of products newly covered by the rule include: • Credit cards; • Deposit advance products; • Overdraft lines of credit (but not traditional overdraft services);

and • Certain installment loans.

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Final Rule: Scope Important notes on scope: • Generally harmonized with credit subject to disclosure

under TILA, codified in Regulation Z. • Exceptions include:

• Residential mortgage • A loan expressly intended to finance the purchase of a motor

vehicle, secured by a lien on the same vehicle • A loan expressly intended to finance the purchase of personal

property, secured by a lien on the same personal property • Credit that is generally exempt from Regulation Z • Credit transaction for which a creditor determines that a

consumer is not a covered borrower using one of the methods set forth in the regulation

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Final Rule: Identification of Covered Borrowers Two Big Changes 1. No safe harbor for self-certification 2. New safe harbor using DoD database or

consumer report obtained from a nationwide CRA

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Final Rule: Identification of Covered Borrowers

1. No restriction on method 2. Safe harbor

- Check DoD Database - Consumer report from a nationwide CRA - Timing - Record retention

3. Effect of safe harbor: not credit offered or extended to a covered borrower (i.e., not “consumer credit”)

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Final Rule: Cost of Credit

• “A creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit.”

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Final Rule: Cost of Credit Cost elements of MAPR

1. Any credit insurance premiums and fees, fee for debt cancellation contract, fee for debt suspension agreement

2. Any fee for credit-related ancillary products sold in connection with the credit transaction or account

3. Finance charges 4. Certain application fees 5. Certain participation fees These charges are included in the MAPR calculation even if they would be excluded from the calculation of the finance charge under Regulation Z

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Final Rule: Cost of Credit Limited exclusion for credit cards Other than the periodic rate, creditors may exclude from the MAPR bona fide fees that are reasonable for that type of fee. - Example 1: Creditor charges a finance charge described in 32

CFR 232.4(c)(1)(III)(A) of 18% on a credit card account, as well as a bona fide participation fee and a bona fide foreign transaction fee. Only the finance charge must be included in MAPR.

- Example 2: Creditor charges the same finance charge of 18% on a credit card account, as well as a bona fide participation fee and a bona fide but unreasonable cash advance fee. All of the fees and the finance charge must be included in MAPR.

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Final Rule: Cost of Credit

Limited exclusion for credit cards “Bona Fide” Fees

1. Compare to like-kind fees 2. Safe harbor: less than or equal to average of similar fees

charged by 5 or more creditors each with at least $3 billion in loans initially extended (or outstanding balances) on U.S. credit card accounts in prior 3 years

3. Other reasonable fees 4. Indicia of reasonableness for participation fees

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Final Rule: Cost of Credit Limited exclusion for credit cards - Examples • When assessing a bona fide cash advance fee, that fee

must be compared to fees charged by other creditors for transactions in which consumers receive extensions of credit in the form of cash or its equivalent.

• When assessing a cash advance fee, that fee may not be compared to a foreign transaction fee.

• Even if other creditors typically charge $100 annually for participation in credit card accounts, a $400 fee nevertheless may be reasonable if (relative to other accounts carrying participation fees) the credit made available to the covered borrower is significantly higher or additional services or other benefits are offered under that account.

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Final Rule: Cost of Credit Limited exclusion for credit cards NOT eligible for exclusion:

- Any credit insurance premiums and fees, fee for debt cancellation contract, fee for debt suspension agreement

- Any fee for credit-related ancillary products sold in connection with the credit transaction or account

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Final Rule: Calculating MAPR • MAPR for Closed-End Credit

• Calculate MAPR following the rules for calculating and disclosing the APR for credit transactions under Regulation Z based on the MAPR charges.

• MAPR for Open-End Credit • Generally, the MAPR for open-end credit should be

calculated following the rules for calculating the effective APR for a billing cycle in Regulation Z (12 CFR 1026.14(c) and (d)).

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Final Rule: Disclosures • Required disclosures:

• Regulation Z disclosures • Statement of the MAPR • Clear description of the payment obligation

• Format: • Orally and in writing • Oral disclosure requirement is satisfied if the creditor

provides the information in person or provides a toll-free telephone number in order to deliver the oral disclosures to a covered borrower when the covered borrower contacts the creditor for this purpose.

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Final Rule: Other Limitations

1. Rollovers (unless a depository described in rule) 2. Waiver of rights 3. Required arbitration 4. Unreasonable notice 5. Access to an account (unless compliant with cost

limitation and otherwise permitted by law) 6. Auto title security (unless a depository described in rule) 7. Allotments 8. Prepayment penalties

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Other MLA Resources • CFPB Press Release and MLA Examination

Procedures • FDIC FIL-65-2016 and MLA Examination

Narrative and Procedures • FRB CA 16-6 and Revised Interagency MLA

Examination Procedures • NCUA 16-CU-07 and MLA Questionnaire (MLA

Examination Procedures forthcoming) • OCC Bulletin 2016-33 and MLA Interagency

Examination Procedures, 2015 Amendments

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