Today's Trends in Credit Regulation

DoD Dramatically Expands the Types of Credit Subject to the Military Lending Act's Requirements and Prohibitions
By James Chareq

On July 22, the Department of Defense issued its final amended regulations implementing the Military Lending Act. The regulations, effective October 1, 2015, apply only to consumer credit transactions consummated (or accounts established) on or after October 3, 2016, for most covered credit products and on or after October 3, 2017, for credit cards. Until that time, the existing regulations apply.

Significantly, the amended regulations retain the exclusion from the definition of "consumer credit" for those transactions in which credit is extended to finance the purchase of personal property, including motor vehicles, when the credit is secured by the property being purchased. The regulations do not apply to such transactions.

Among the important amendments to the regulations are those which

  • provide for the delayed applicability of the regulations;
  • expand the coverage of the regulations to other credit products (in addition to payday loans, vehicle title loans, and refund anticipation loans, which were already covered);
  • create a means by which a creditor can conclusively establish a consumer's "covered borrower" status for purposes of the regulations' coverage; and
  • clarify the process for calculating the Military Annual Percentage Rate.

Effectiveness and Applicability of the Amended Regulations

Although the amended regulations do not, as a general matter, apply to consumer credit extended to a covered borrower or a covered borrower's dependent until October 3, 2016, there are two exceptions to this delayed applicability.

First, the preemption provision, which became effective on January 2, 2014, applies to extensions of consumer credit between October 1, 2007, and October 3, 2016. The preemption provision preempts state laws that are inconsistent with the MLA unless the state law provides the covered borrower with greater protections than does the MLA. It also prohibits states from authorizing creditors to charge covered borrowers interest rates that are higher than the legal limit for the states' own residents and prohibits states from differentiating between the protections offered to consumers under their own credit laws based on the covered borrower's nonresident or military status, regardless of the covered borrower's identified domicile or home of record. Second, the amended penalty and remedy provisions, which were incorporated from the MLA itself, apply to consumer credit extended on or after January 2, 2013.

The significance of these exceptions is limited until the expanded definition of "consumer credit" becomes applicable on October 3, 2016.

Expanded Coverage to Include More Credit Products

As currently in effect, the MLA and its implementing regulations apply to "consumer credit," which is narrowly defined to mean: (i) payday loans meeting certain criteria ($2,000 or less with a term of 91 days or less); (ii) vehicle title loans with a term of 181 days or less; and (iii) tax refund anticipation loans. Certain other types of credit are expressly excluded from the definition of "consumer credit." These include: (i) residential mortgages; (ii) credit transactions to finance the purchase of a motor vehicle, or other personal property, when the extension of credit is secured by the purchased property; (iii) credit secured by a qualified retirement account; or (iv) any other credit transaction.

The DoD's comments, published along with the amended regulations, explain its belief that, under the existing definition of "consumer credit," the regulations do not provide the protections to servicemembers that were intended by the MLA. In the DoD's view, the narrowness of the definition created "loopholes" that permitted some creditors to "evade" the MLA's requirements. To address these perceived deficiencies, the DoD greatly expanded the definition of "consumer credit" to mean any "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 written agreement in more than four installments. The exclusions for residential mortgages and for purchase-money credit transactions secured by the purchased property (including motor vehicles) were retained.

Safe Harbor Procedures to Determine Whether a Consumer is a Covered Borrower

The current regulations, which apply until October 3, 2016, permit a creditor to exclude a consumer credit transaction from coverage of the MLA implementing regulations if: (i) the creditor provides a Covered Borrower Identification Statement to the applicant, and the applicant signs the statement indicating that he or she is not a covered borrower or a dependent of a covered borrower; and (ii) the creditor does not learn that the applicant is a covered borrower through the use of one of the identified optional verification procedures. The current regulations include model language permitting the applicant, or dependent, to self-identify as a consumer who would be a covered borrower or the dependent of a covered borrower.

The amended regulations explain that the creditor can use its own method to determine whether a consumer is a covered borrower for purposes of the regulation. If the creditor wants the benefit of the so-called "safe harbor," which permits the creditor to "conclusively determine" the consumer's status, the creditor must either:

(i) verify the consumer's status using information (if any exists) obtained directly from the DoD database maintained at https://www.dmdc.osd/mil/mla/welcome.xhtml; or

(ii) verify the consumer's status using a statement, code, or similar indicator describing that status, if any, contained in a consumer report obtained from a nationwide consumer reporting agency or a reseller of such reports.

Calculating the Military Annual Percentage Rate

The amended regulations retain the existing 36% MAPR limitation, but provide a fuller explanation concerning the calculation of the MAPR. When the regulations become applicable, the MAPR must include: (i) credit insurance premiums; (ii) fees for credit-related ancillary products sold in connection with the transaction either at or before consummation; and (iii) except for a bona fide fee that may be excluded: (a) finance charges; (b) any application fee charged to a borrower (except that this limitation does not apply to a federal credit union or an insured depository institution when making certain small dollar loans); and (c) any fee imposed for participation in any plan or arrangement for consumer credit. The provisions concerning calculation of the MAPR and what may be excluded from that calculation are detailed and often refer to the Truth in Lending Act's implementing Regulation Z.

A Year to Comply

The amended regulations are complex. Many of the provisions will require systems adjustments and testing that could take weeks or months. For this reason, the DoD provided a 12-month period, between the October 1, 2015, effective date and the October 3, 2016, required compliance date, to allow creditors a reasonable opportunity to modify their operations and the terms and conditions of their credit products to meet the requirements of the amended regulations.

James Chareq is a partner in the Washington, D.C., office of Hudson Cook, LLP. Jim can be reached at 202.327.9711 or by email at

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