If your credit union isn’t located on a military base, the Military Lending Act (MLA) may not seem like a major regulatory issue affecting your credit union. However, there have been some recent changes made to the MLA ahead of the October 3rd, 2016 compliance date that will affect how you lend to members of the military and their dependents. But let me give you some background information first.
The MLA was originally enacted in 2007 with provisions covering pay day loans, vehicle title loans and tax refund anticipations loans made to members of the military. These loans could not be made with the Military Annual Percentage Rate (MAPR) of over 36%. This rate is calculated differently than the traditional Truth in Lending Act (TILA) APR because it includes the cost of fees and other charges.
Fast forward to 2015 when proposed amendments from the Department of Defense were enacted that expanded the types of credit products that are covered by the 36% cap. The amended Act expanded the definition of consumer credit covered by the Act to include both closed ended and open ended products such as installment loans, private student loans, overdraft lines of credit and unsecured open ended lines of credit in addition to the originally covered pay day loans, vehicle title loans and tax refund anticipation loans.
In addition to the 36% MAPR, lenders must ensure the security agreement or cross collateralization of accounts subject to the MLA do not permit a security interest in funds or other loans consummated prior to the loans subject to the MLA. This can pose a serious problem to most credit unions whose standard security agreement includes both funds deposited and collateral secured in the past and all funds and collateral secured in the future. Under the MLA provisions, only funds and collateral secured in conjunction with the loan covered under the MLA and any future deposits may be included in the security agreement.
So how does a credit union determine if a loan is subject to the MLA provisions? Lenders have been provided a safe harbor for determining if a loan is being extended that is subject to the MLA provisions if the credit union searches the Department of Defense website to ascertain the status of the applicant before them or the lender may rely on a credit report to indicate active duty status. The MLA also applies to any dependents.
The rule does not apply to any loan made to finance the purchase of a vehicle, residential mortgage loans and transactions not covered by Reg Z.
Does your credit union need some assistance developing a plan for MLA compliance? Let CURx help. We understand the operational implications this Act will pose and can help your credit union become compliant prior to the October deadline.