Thu, Dec 8, 2016
One great thing about the holiday season is pie. There’s not much better than a slice of classic apple pie to top off a big holiday meal. However, baking a perfect apple pie is no easy feat. The novice pie-maker might assume that the Red Delicious apple left over from last week’s grocery shopping would work as well as any old apple, but that’s a mistake that would lead to a disappointing pie. When it comes to pies, not all apples are equal. The general consensus is that Granny Smith apples—crisp, tart, and snappy—are the best all-around pie apples.
Just like the uninformed pie-maker looking for pie apples, the uninformed lender can get tripped up by the seeming similarities between regulations regarding military lending. There are two key regulations that affect military lending: the Military Lending Act (MLA) and the Servicemembers Civil Relief Act (SCRA). These two acts have such similar protections that it’s easy to get them confused. And with the changes the Department of Defense recently made to the MLA, things have the potential to become even more confusing. However, there are some key differences between the two acts, as well as some key highlights to the new MLA, that will help to keep everything straight.
The Military Lending Act has been around since 2007. Initially, the regulation only applied to high-cost payday loans, vehicle title loans, and refund anticipation loans involving covered borrowers. The DOD felt that the regulation was a bit out of date and could be more effective in providing protections for servicemembers, so the final rule makes the MLA applicable to a broader range of credit products.
The Servicemembers Civil Relief Act dates way back to 1940. It protects service members on existing debts when the service member is active duty. The Military Lending Act, on the other hand, comes into play when the service member applies for a credit product while currently active duty.
For example, if a service member has an account with a financial institution and then becomes active duty military, SCRA protections apply. In contrast, if the service member is currently active duty and is extended credit, MLA protections apply.
Remember, both protections are based on active duty status. This should be verified from the Defense Manpower Data Center or a national credit bureau.
The protections provided by the two acts are also mostly different, but include some overlap. The SCRA mainly covers home loans, vehicle loans, and credit cards. With the new rule, MLA protections apply to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards.
There are also key differences in the interest rate limitations. The SCRA caps interest rate charges, including fees, at 6 percent. The MLA limits interest rates and fees to 36 percent MAPR, or Military Annual Percentage Rate. The MAPR is not just the interest rate on the loan, but also includes fees and charges such as credit insurance premiums, debt cancellation contract fees, debt suspension agreement fees, and fees associated with ancillary products. Under the new rule, closed-end credit MAPR is a one-time calculation; while open-end credit transactions need to be calculated for each covered billing cycle to make sure the lender is in compliance with interest rate limitations.
The last major difference between the two acts is disclosure requirements. Only one set of circumstances triggers SCRA disclosures. HUD requires SCRA written disclosures only on mortgages at 45 days of delinquency. Under the MLA, disclosures are required both in writing and orally, and financial institutions must provide MAPR statement disclosures, payment obligations descriptions, and other applicable Regulation Z disclosures.
The New MLA
The new rule applies only to covered borrowers. Covered borrowers include:
- Active duty service members (under a call or order that doesn’t limit the service to 30 days or less)
- Active Guard or Reserve duty under an order of full-time duty for a period of 180 consecutive days or more
- Dependents of the above, which are defined as:
- A spouse
- A child under the age of 21
- A parent or parent-in-law living in the service member’s household
There are two options for determining who qualifies as a covered borrower. The first option is to look at the Department of Defense’s database (DMDC database). This requires the borrower’s last name, date of birth and social security number. The second option is to use a consumer report obtained from a nationwide consumer reporting agency. Either of these methods will grant you safe harbor.
When it comes to our service members, we should strive to provide them with the best service possible. That means complying with MLA and SCRA regulations. There are many smaller changes and differences between the two Acts, but we’ve hit the highlights. So take a good look at both rules to determine how your institution can best implement the changes.