​​Office of Consumer Protection Report: Understanding the Protections for Services Members and Their Families

A regulation issued by the Department of Defense implementing the Military Lending Act provides consumer credit protections for members of the military and their dependents. In 2015, DoD amended the regulation to extend the protections of the Military Lending Act to a broader range of closed-end and open-end credit products.

Previously, the regulations only governed payday loans, vehicle title loans and taxrefund anticipation loans. The revised rules apply to most consumer credit subject to the Truth in Lending Act and its implementing regulation, Regulation Z. They cover installment loans and small-dollar loans, including payday alternative loans federal credit unions make under NCUA's regulations and overdraft lines of credit with finance charges.

The revised regulation was effective Oct. 1, 2015, but compliance becomes mandatory on Oct. 3, 2016. In addition, beginning Oct. 3, 2017, credit unions will need to comply with the required provisions covering credit card accounts.

Credit excluded from coverage includes:

  • Residential mortgage transactions (credit secured by an interest in a dwelling);
  • Transactions to finance the purchase of a motor vehicle or personal property secured by the purchased vehicle or property; and
  • Transactions exempt for the purposes of Regulation Z—other than a transaction exempt under 12 CFR 1026.29, which addresses state-specific exemptions—or otherwise not subject to the disclosure requirements under Regulation Z.

Although the amendments slightly alter the categories of consumers covered, the regulation still protects active-duty service members and their dependents. Just like before, it applies to transactions entered into while the service member is on active duty. The regulation permits your credit union to use its own method of determining whether a member is a covered borrower. In addition, the revisions provide a new safe harbor when you use one of two methods to determine whether an applicant is a covered borrower:

  • Checking the applicant's status using DoD's Defense Manpower Data Center database, which can be done at no charge; or
  • Verifying the status of a consumer using information contained in a consumer report from a nationwide credit reporting agency.

The 36-percent cap on the military annual percentage rate, or MAPR, remains. MAPR captures application fees and most participation fees, even though they are excluded from the calculation of annual percentage rate under Regulation Z. However, federal credit unions can exclude from the MAPR one application fee during a rolling 12-month period for payday alternative loans made in compliance with NCUA's regulation. All credit unions can exclude certain bona fide, reasonable fees related to credit card accounts.

Credit unions must also provide three disclosures to a covered borrower before or at the time the borrower becomes obligated on the transaction or establishes an account for consumer credit:

  • A statement of the MAPR—the regulation contains a model statement of MAPR;
  • All disclosures required by Regulation Z, in accordance with Regulation Z; and
  • A clear description of the payment obligation, which can be a payment schedule for a closed-end transaction or an account-opening disclosure for open-ended credit.

In addition to providing the disclosures in writing, credit unions must orally provide the statement of MAPR and description of the payment obligation. This can be done in person or through a toll-free telephone number provided to the borrower.

As under the previous regulation, it is unlawful for covered consumer contracts to require service members or their dependents to:

  • Waive their right to legal recourse,
  • Submit disputes to arbitration, or
  • Establish an allotment to repay the obligation (except military-welfare societies and service-relief societies may establish allotments).

The revised regulation also contains other requirements and restrictions.

For additional information, review NCUA's Regulatory Alert, 16-RA-04, "Guidance on Regulatory Changes Affecting Military Members" for guidance on the amended regulation. It is available at http://go.usa.gov/cwjdV.