On July 21, 2015, the U.S. Department of Defense (“DOD”) announced the final rule amending the Military Lending Act’s (“MLA”) implementing regulations. The changes apply the MLA’s strict lending restrictions to consumer credit card issuers and unsecured consumer lenders—including depository institutions that have never before been subject to the Act. While institutions have been working over the past several years to build Servicemembers Civil Relief Act (SCRA) compliance programs, the revised MLA regulations mean that depository institutions must comply with an entirely new set of legal requirements for military borrowers. Under the final rule, credit card, student loan, and other covered consumer accounts held by military borrowers cannot carry a “military annual percentage rate” or “MAPR” of more than 36%, which is comprised of the traditional measure of APR in the Regulation Z, as well as certain fees, including finance charges, credit insurance premiums, and fees for ancillary products. Additionally, consumer lenders are prohibited from enforcing arbitration clauses against qualifying military borrowers and are required to comply with additional disclosure obligations.
 
According to the DOD, these substantial changes are intended to address short-term, small dollar lenders who have avoided the protections and restrictions of the MLA by offering slightly modified loan terms that fall outside the scope of the MLA’s coverage.
 
The revised regulations are effective on October 1, 2015, although compliance is not required until October 3, 2016. Additionally, the regulations provide a temporary exemption for credit cards until October 3, 2017.
 
Purpose of the Changes. The DOD explained that the lending practices the MLA was intended to restrict have survived because of limitations in the statute and the regulatory definitions of its scope. Specifically, the DOD stated that the proposed amendments were designed to better protect servicemembers by expanding financial protections to prevent high-interest, short-term lenders from evading the MLA by making changes to the products.1 The Consumer Financial Protection Bureau (“CFPB”) described the proposed changes as “clos[ing] loopholes that have led to lenders skirting the law with products that fall outside the scope of existing regulations.”²
 
Military Lending Act’s Scope. The restrictions of the MLA had applied only to specific types of credit products. The revised regulations expand the definition of in-scope products, thereby applying the restrictions and requirements of the MLA for qualifying military borrowers to a wider range of consumer credit products.

• Previous Definition of “Consumer Credit.” The MLA applies to “consumer credit” and states that the term does not include residential mortgages or purchase-money consumer loans secured by personal property, such as auto loans; the definition of the term is otherwise delegated to DOD regulation.³ Previously, the applicable regulations defined “consumer credit” as including only closed-end payday loans, vehicle title loans, or tax refund anticipation loans, which are products not offered by most major financial institutions.⁴
• Expanded Definition of “Consumer Credit.” Under the revised rule, “consumer credit” now encompasses the forms of credit that are subject to the Truth in Lending Act (“TILA”). This expanded scope most notably now includes credit cards and student loans. The commentary to the rule also notes that it would include overdraft lines of credit, but not more traditional demand deposit account overdraft protection services.⁵
• Application to Insured Depository Institutions and Insured Credit Unions. The proposed rule solicited comments regarding whether the rules should exclude insured depository institutions or insured credit unions. Although a number of industry commentators supported such exclusion, the final rule does not exempt these institutions. The DOD questioned whether supervision of these institutions was sufficient to limit the costs of credit to the armed forces and it did not find arguments that regulations would limit availability of credit persuasive. 

Covered Borrowers. The MLA restrictions apply only to accounts opened while the borrower is in a protected period. The amendments define “covered member” as a member of the armed forces who is serving on active duty under Titles 10, 14, or 32 of the U.S. Code, for a period of at least 31 days, active guard and reserve duty as defined in Title 10, or the dependents of these individuals.⁶ The restrictions only apply to accounts opened while the customer is eligible, and the protections terminate if the customer ceases to be eligible for MLA protection (for example, the borrower leaves military service).
 
Military Lending Act Restrictions. The following key provisions of the MLA now apply to the expanded scope of credit products:

• Maximum Interest Rate: Creditors may not impose a “Military APR” (MAPR) greater than 36% with respect to the consumer credit extended.
• Loan Disclosures: The MLA also requires certain loan disclosures in connection with the extension of consumer credit. Creditors must provide the following information orally and in writing before the issuance of the credit: (i) a statement of the MAPR applicable to the extension of credit; (ii) any disclosures required under Regulation Z; and (iii) a clear description of the payment obligations of the servicemember or dependent.
• Other Prohibited Credit Terms: The MLA also prohibits creditors from extending credit to servicemembers or their dependents under terms that, among other things, (i) require the borrower to submit to arbitration; (ii) require the borrower to waive his or her right to legal recourse under any otherwise applicable provision of State or Federal law, including any provision of the Servicemembers Civil Relief Act; or (iii) prohibit the borrower from prepaying the loan or charges a penalty or fee for prepaying all or part of the loan. 
• Void Contracts: Credit agreements, promissory notes, or other contracts that are not in compliance with the MLA requirements are void.

Exclusion of Bona Fide Fees. The final rule exempts certain fees from the MAPR if the fees are both “bona fide” and “reasonable.” This exclusion is designed to allow creditors to continue assessing fees specifically tied to a “bona fide, specific products or services” that are based on the servicemember’s use of the account, such as cash advance, participation, or foreign transaction fees, while also preventing creditors from issuing products with a low APR, but unusually high fees, as a means of evading the MLA’s requirements. For each of these fees, the regulations provide a safe harbor if the fees is equal to or less than the average of the amount charge by five (5) other credit card issuers of sufficient size (more than $3 billion outstanding in credit card loans) for a “like-kind” fee.
 
Safe Harbor. A major area of comment following the proposed rules was the safe harbor provided to lenders who search the MLA database and do not identify the borrower as entitled to MLA protections. Under the final rules, a creditor may obtain a safe harbor by verifying the status of a consumer on the Department of Defense Manpower Data Center (“DMDC”), either directly or indirectly, or by using a consumer credit report that contains military status. The final rule also clarifies that this search only needs to occur at the time the consumer seeks to obtain credit. The comments to the final rule did not fully respond to concerns by creditors, however, regarding the availability of the safe harbor in instances where the DMDC is unavailable and the ability of the DMDC to process substantially increased numbers of searches.
 
Delayed Date for Compliance. In response to comments regarding the complexity of implementing the regulations—particularly for credit cards—the DOD has delayed the required compliance dates. Compliance with the amended rules is not required until October 3, 2016 (one year). Additionally, the DOD granted a two-year exemption for credit cards until October 3, 2017, and the rule permits the credit card extension to be extended for an additional year by the Secretary of Defense.
 
The final MLA regulation was published in the Federal Register on July 22, 2015 and is available at: https://federalregister.gov/a/2015-17480.

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In a separate military-related development highlighting the CFPB’s focus on servicemember issues, on July 20, 2015, the CFPB also took action related to military borrowers by sending letters to several companies that sell retail goods to military servicemembers. The letters advised the recipients to review their websites and advertising for potentially misleading marketing and to review practices related to payment by military allotment. The military discretionary allotment system allows servicemembers to automatically direct a portion of their paycheck to financial institutions or people of their choosing. Active-duty servicemembers are not permitted, however, to use allotments to pay for personal property, such as vehicles and consumer electronics. According to the letters, the CFPB is concerned that companies are still advertising repayment by way of military allotment and may be violating federal consumer financial protection laws.

 ¹ See Press Release, “Department of Defense Issues Final Military Lending Act Rule,” July 21, 2015, http://www.defense.gov/releases/release.aspx?releaseid=17395; Press Release, “Obama Administration Proposes New Regulations to Expand Important Financial Protections for Military Families,” Sept. 26, 2014, http://www.defense.gov/releases/release.aspx?releaseid=16954.

² Press Release, “Consumer Financial Protection Bureau Releases Statement on Department of Defense Proposal to Amend Military Lending Act Rule,” Sept. 26, 2014.

³ See 10 U.S.C. § 987(i)(6).

⁴ See 32 C.F.R. § 232.3(b).

⁵ As a general matter, TILA covers credit offered or extended to consumer primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments. See 12 C.F.R. § 1026.1(c)(1).

⁶ Although the SCRA and the MLA both apply to the servicemember population, they are not redundant of each other. The MLA only applies where the individual was on qualifying military service at the time of origination. By contrast, the SCRA’s interest rate benefit only applies where the individual was not on military service at the time of origination. The statutes are therefore covering largely mutually exclusive populations.