Military Lending Act Amended – Part Two – What is a Covered Transaction?
In last month’s newsletter, we introduced the U.S. Department of Defense’s amended Military Lending Act of 2015 (MLA) which outlined the “safe harbor” provisions of the Act. This edition will help define what a covered transaction is.
The amendments to the Act expanded the types of consumer purpose credit products extended to active duty service members and their immediate family members, defined the methods for verification to assess who’s covered, imposed a 36% Military Annual Percentage Rate (MAPR) cap and modified the necessary disclosures that must be provided to covered consumers. The changes are effective for open or closed-end consumer loans consummated on or after October 3, 2016, and for consumer credit card accounts established on or after October 3, 2017.
When the MLA was enacted in 2006, the focus was centered on “high-cost” consumer credit products commonly known as payday loans and only applied to three types of consumer credit. However, the recent amendments have expanded the types of covered transactions and now define covered service members and immediate family transactions as “all open and closed-end consumer loans and credit cards”, with the following exceptions:
- Loans secured by residential mortgages (including loans on mobile homes);
- Loans to purchase personal property or a vehicle, if secured by the property or vehicle being purchased; and,
- Loans that are exempt from the requirements of the Truth in Lending Act – Regulation Z
As discussed in last month’s article, the Act does not require a financial institution to assess a consumer’s military status; however, failure to do so increases the risk that a covered transaction will be consummated that did not comply with the Act’s requirements. The covered borrower statement that many financial institutions use currently will no longer comply or provide safe harbor. The verification of the consumer’s status must be completed no more than 30 days prior to the date of consummation or the date the consumer establishes an account and no more than 60 days prior to an offer of credit provided to a consumer and to which the consumer has responded. For subsequent loans or renewals, it is whenever a new account is established for a covered borrower.
In addition, the calculation of the Military Annual Percentage Rate (MAPR) includes all charges assessed in the transaction and not just the finance charges, as required under Regulation Z’s Annual Percentage Rate (APR) calculations. All charges must be included if they are financed, deducted from the loan proceeds or required to be paid as a condition of the credit. The charges include interest, fees, credit service charges, credit insurance premiums or debt cancellation insurance premiums (even if voluntary) and any other credit-related product fees sold in connection with the transaction. If an application fee is assessed, this fee must also be included in most circumstances. For covered consumers, the MAPR cannot and must not exceed 36%.
If a covered loan is consummated to a covered borrower, a Statement of the MAPR must be provided orally and in writing; the transaction may not include an arbitration provision in the event of a dispute and may not assess a prepayment penalty.
To ensure compliance, we recommend that the bank thoroughly review the Act, test its software systems, and insure that its lending program has been enhanced.