The Military Lending Act (MLA) was created to protect active duty members of the military, their spouses, and their dependents from certain lending practices that could pose a risk and a possible threat to military readiness as well as affect the retention of military service members. Since the inception of the MLA in 2006, there have been a number of changes to the program’s rules and regulations. In 2015, the final rule was announced which involves expanding the types of credit products that are covered by the 36-percent rate cap and other military-specific protections covered under the MLA. These changes can have a major impact on financial institutions if they are not compliant to rules that affect this act and credit card accounts.
Up until this point, the MLA rule amendments only affected covered credit transactions completed on or after October 3, 2016, and excluded credit card transactions. However, by October of this year, credit card products will be held to the same regulations and will be required to comply with the MLA’s final rule.
With the compliance deadline for credit card account rules quickly approaching, it’s important that finanacial institutions are aware of the regulation changes. Here is what you need to know about the new MLA rules.
The MLA rules have expanded the range of covered transactions. This means that the term “consumer credit” is broader and follows the same definition of what is covered under Regulation Z, which contain rules that protect consumers against misleading practices by the lending industry.
Under the MLA, military service members are protected by the 36-percent limit that is in place for the annual cost of credit. This is known as the Military Annual Percentage Rate (MAPR). The MAPR does not only protect military consumers through the capped rate limit, but there are also additional items that fall under Regulation Z’s disclosures to provide additional security for consumers.
Should a financial institution not comply with Regulation Z, then, they too, would be in violation of compliance with the MLA. In turn, they could face serious consequences from both parties, including penalties and disciplinary actions. Lenders could also be in violation of Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP) which could ultimately have a long-term impact on their reputation and overall business.
Just like the military-specific percentage rate, there are also military-specific disclosures that are required per the MLA. Some of these disclosures include requirements dictating when a service member can submit for arbitration, waive rights, and permit certain credit securities. It’s important that all necessary disclosures are up to date in order to be compliant and not incur penalties.
As of now, financial institutions can use the Department of Defense’s MLA database to validate active-duty military personnel. However, there can be some major roadblocks if this is the sole process used. For one, the database does not guarantee real-time, accurate information and institutions would then be vulnerable to out-of-date information. Secondly, the database does not take into account spouses and dependents of the military service member.
As a best practice and to ensure accuracy, financial institutions should implement a second process to catch what the database does not. A good time to verify military status is at time of application or at closing.
A whole new set of complex problems arise now that the MLA will also include credit cards. Unlike other credit products, credit cards may be offered at a point of sale and therefore, out of the lenders' control. So, how can they regulate MLA credit cards from non-MLA cards? Financial institutions will need to decide on a plan that works for both them and their vendors in order to identify when MLA regulations and disclosures are required.
There are a lot of pieces involved in the MLA puzzle and ensuring that you remain compliant can seem overwhelming, but knowing the requirements and being prepared before the October deadline will keep your financial institution from incurring violations and penalties. The financial interest of all members should always be top of mind, and service members are no exception. Share with us how your financial institution is preparing for this change to MLA credit cards.