You may feel you have a little time to catch your breath after implementing the new TRID Integrated Disclosure rules, but don’t take too long; the Military Lending Act (the “Act”) went into effect October 1, 2015, with required compliance by October 3, 2016. That leaves you approximately six months to make sure your procedures and systems are in place.
Unlike the John Warner National Defense Authorization Act, which didn’t apply to the products offered by many community banks, this new rule will most likely apply to you. The Act covers consumer credit subject to Regulation Z with the exceptions of credit secured by a dwelling (one- to four-family dwellings including mobile homes whether or not attached to land) and vehicle and personal property purchase money transactions secured by the property being purchased. This means that personal lines of credit, credit cards, and other consumer loans that are not purchase money loans or dwelling-secured are covered by the Act.
The requirements of the Act only apply to covered borrowers who are consumers who at the time they become obligated under a credit transaction or establish an account are a member of the armed forces and are on active duty. The Act only applies while they are on active duty. Therefore, any account opened while the consumer is not on active duty is not covered, and any account that was covered will no longer be covered once the consumer is no longer on active duty. A creditor is allowed to apply its own methods for determining whether a borrower is on active duty; however, a safe harbor exists if the creditor does one of the following:
- The creditor can check, PRIOR to the borrower entering into a transaction or establishing an account, the borrower’s status by checking the Department of Defense, https://mla.dmdc.osd.mil/ website and searching by last name, date of birth, and social security number; OR
- The creditor can verify the status by viewing a consumer report from a nationwide consumer reporting agency and looking for a statement, code, or similar indicator describing the status.
Documentation of the creditor’s method of determining the borrower’s status must be retained in order to obtain the safe harbor. The records should support that the status was verified within 30 days prior to the time the credit was originated. If a consumer receives an offer of credit and does not reply within 60 days, verification of status must occur again before credit can be extended.
- When lending to a covered borrower (a borrower on active duty), a creditor must disclose the following in writing with the first and third items also being disclosed orally:
The Military Annual Percentage Rate (MAPR)—a model statement is available and does not require the actual numerical value to be disclosed.
- Regulation Z disclosures.
- A clear description of the payment schedule.
The MAPR is calculated using the current APR calculations in Regulation Z; however, additional items are considered prepaid finance charges. These include credit insurance premiums, premiums for debt cancellation or debt suspension agreements, and fees for any credit-related ancillary products. Except for credit card fees considered reasonable and bona fide, they also include prepaid finance charges, participation fees, and application fees unless for short-term low dollar credit. Fees may be excluded from the MAPR calculation for credit card accounts if the fee is reasonable and bona fide. Definitions and a safe harbor are included to determine what is considered reasonable and bona fide.
There are also limitations to the terms of consumer credit granted to covered borrowers including:
- The military APR must be agreed to by contract and cannot exceed 36%.
- No fees can be charged on open-end credit if there is no balance outstanding during the billing cycle except a participation fee that does not exceed $100. (Note: This restriction does not apply to participation fees charged on credit card accounts as long as the fee is reasonable and bona fide.)
So, while you may be looking forward to a much deserved break after TRID implementation has been completed, it may be a good idea to start working on the procedures you will need to have in place to implement the Military Lending Act. October 2016 will be here before we know it.