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InfoSight Spotlight: Servicemembers (and Dependent) Consumer Lending (Military Lending Act)
Thursday, September 29, 2016 6:30 AM

As required by the John Warner National Defense Authorization Act for Fiscal Year 2007 which added 10 USC 987, the Department of Defense (DOD) issued a regulation that implements the Military Lending Act (MLA) regarding the terms of consumer credit extended by creditors to service members and their dependents.

In July 2015, the changes were made the impacted the MLA and became effective on Oct. 1, 2015. Credit unions have until October 3, 2016 to comply. Credit unions should have policies and procedures in place to determine if their new borrowers are considered “covered borrowers” under the MLA. If the covered borrowers are identified and loan is also a “covered loan” the credit union should understand their Military Annual Percentage Rate (MAPR) limitations as well as the required disclosures that need to be provided prior to consummation.

Loans Covered Under the Rule

The rule defines “consumer credit” as any credit offered or extended to a covered borrower primarily for personal, family, or household purposes and that is:

  1. Subject to a finance charge; or
  2. Payable by a written agreement in more than four installments.

Identification of Covered Borrowers

A “covered borrower” is defined as a person with the following status at the time (s)he becomes obligated on a consumer credit transaction:

  • A regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or less, or such a member serving on Active Guard and Reserve duty [as defined in 10 U.S.C. 101(d)(6)]; or
  • The covered borrower’s dependent(s) as described in subparagraph A, D, E or I of 10 USC 1072(2). Generally, this may include a spouse, child (under 21 or 23 if full time student or no age limit if there is a mental/physical incapacity); could also be a parent or in-law (if supported by the covered borrower); another adult in legal custody of the covered borrower.

The regulation contains safe harbor methods to determine if a borrower is considered “covered” under the rules. In general, the credit union can verify the status by using information related to the borrower, obtained directly or indirectly from the DOD database. Historic lookbacks are prohibited under the rule, so the credit union would not be permitted to obtain information from the DOD database to determine if a borrower would have been covered as of the date the transaction was conducted or account established.

The credit union is also provided with a safe harbor for determining covered borrower status if they use a consumer report from a nationwide consumer reporting agency.

The credit union that makes the covered borrower determination by using one of the safe harbor methods above shall be deemed to be conclusive with respect to that transaction or account, so long as the credit union timely creates and maintains a record of the information obtained.

For additional information, click here for the topic.