5 minutes
If your credit union is like most financial institutions, you have been spending a lot of time and money over the past year preparing for the Military Lending Act revisions that took effect earlier this month. These amendments significantly expand the scope of the regulations governing credit unions’ extension of certain consumer credit transactions to active duty members of the U.S. Armed Forces and their dependents. Most notably, the revised rules widen the definition of “consumer credit,” offer two new safe harbor tests to determine whether a borrower is a “covered borrower,” and add new oral and written disclosure requirements.
With the majority of these changes going into effect Oct. 3, have you done everything you need to do to ensure compliance? Here are some suggested steps to take to make sure you are ready for these new regulations.
1. Establish procedures to determine “covered borrower” status.
In addition to broadening the definition of a “covered borrower,” the MLA amendments replace previous language with two new methods to conclusively determine whether a borrower is covered under the the act: (a) searching the Department of Defense’s database directly or indirectly and (b) verifying a borrower’s status using a consumer report obtained from a nationwide consumer reporting agency or reseller of consumer reports.
To take advantage of either safe harbor, a credit union must make a covered borrower determination no more than 30 days prior to the initiation of the covered credit transaction or application for the covered credit account. A 60-day look-back period applies to firm offers of credit.
Although there is no requirement that a credit union use one of the two safe harbor methods to determine covered borrower status, if you choose to take advantage of either safe harbor, you must be sure procedures are in place to determine a borrower’s status on all covered transactions in a timely manner and to maintain records of that determination.
2. Contact your credit reporting agency.
If you choose to take advantage of the credit reporting agency safe harbor, be sure you have contacted your consumer reporting agency to request that a covered borrower search be included in your credit reports.
3. Contact your forms vendor to confirm compliance.
The MLA amendments also change the written disclosures that must be given to covered borrowers at or before the time the borrower becomes obligated on the covered transaction or opens a covered account. The new disclosures include: (a) a statement of the military annual percentage rate applicable to consumer credit, (b) all disclosures required under Regulation Z, and (c) a clear description of the payment obligation of the covered borrower.
Requirements (b) and (c) can generally be met through standard Reg. Z disclosures. However, item (a) is a substantial change from the prior requirements. Thankfully, the amended MLA regulations include a model MAPR statement to offer an easy way to fulfill this requirement. This general statement is in lieu of the numerical MAPR that was previously required and should be included in your loan documents verbatim.
4. Familiarize yourself with the new oral disclosure requirements.
Credit unions must give covered borrowers the MAPR statement and description of the payment obligation both in writing and orally. While this is not a new requirement, the amended regulations add an alternative method for providing the required oral disclosures.
Under the amended regulations, credit unions can fulfill the oral disclosure requirement by either (a) providing the disclosures orally in person or (b) including a toll-free number a borrower may call to receive these disclosures at a later date. If you choose the toll-free number option, this number must be included in the credit transaction, account application or any written disclosure required under the MLA regulations.
The Department of Defense further simplified the oral disclosure requirements in the guidance it published on Aug. 26. That guidance clarifies that the oral description of the covered borrower’s payment obligation does not have to be specific to any given transaction or account. Instead, generic disclosures are acceptable.
5. Review your credit agreements to make sure prohibited terms are not included.
The MLA regulation makes it unlawful for credit unions to condition the extension of consumer credit to a covered borrower on certain enumerated terms, including accepting mandatory arbitration, charging a penalty fee for prepaying all or part of the credit, and using a check or other method to access a member’s existing credit union account. Any credit agreement that contains these prohibited terms will be invalid and may make a credit union subject to criminal or civil liability.
Two main approaches can help ensure that your credit agreements do not contain prohibited terms. One is to maintain two separate sets of loan documents, one for use with covered borrowers and another to use with non-covered borrowers. However, the Department of Defense’s MLA guidance clarifies that maintaining two sets of documents is unnecessary. Instead, credit unions may use the same set of documents for all borrowers, regardless of whether they contain terms prohibited under the MLA, so long as the agreement includes a contractual “savings” clause applying the proscribed term or terms only to non-covered borrowers.
6. Develop internal MLA policies and procedures that show compliance.
Having procedures and policies in place to ensure compliance with the MLA can help you avoid civil liability. Civil liability for an MLA violation can be avoided if a credit union can show by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error, such as a clerical error, that occurred notwithstanding the maintenance of procedures designed to avoid any such error. To take advantage of this defense, you should have internal policies and procedures in place evidencing MLA compliance.
The MLA amendments are substantial and likely require significant changes to the way credit unions extend credit. While the suggestions in this article are not exclusive, I hope you will find them a useful way to double-check that you have done all you need to get ready for the first round of changes.
Meredith Strange, is a shareholder with the law firm Williams Gautier, Tallahassee, Fla.
