Identifying a covered borrower Lenders are permitted to ask applicants if they are members of the military, but this way will not provide the lender with the protection of a safe harbor in the MLA rule. To avail itself of the safe harbor, a lender must use one of two specified ways to conclusively determine coverage. The safe harbor methods are: • Querying the MLA lookup webpage from the Defense Manpower Data Center (DMDC) at mla.dmdc.osd.mil. After the lender enters the consumer’s information in the search form, the system will return a certificate identifying whether the borrower is an MLA-covered service member or a family member. • Using information in a credit report from a nationwide consumer reporting agency or a reseller to determine MLA status. The nationwide bureaus are granted access to the MLA database to make these determinations and provide some sort of MLA indicator in a borrower’s credit report. Covered borrower status must be determined before a loan is closed, not after closing, to see if MLA protections should have applied. MLA requirements The three general protections afforded covered borrowers by the MLA rule are: 1. Military annual percentage rate (MAPR) of no more than 36 percent. The MAPR differs from the Regulation Z APR because it is an “all in” — taking into account not only the finance charge but also many fees Regulation Z excludes from the finance charge (including some application and participation fees, credit insurance fees and premiums, and fees for credit-related ancillary products). 2. Disclosure of a statement of the MAPR (not necessarily its numerical value) describing the charges imposed that go into the calculation of the MAPR. A model statement is provided in the rule. This disclosure must be given both orally and in writing, but the oral disclosure may be given either in-person or through a toll-free telephone number. 3. Restrictions against lenders requiring waivers of the MLA protections, mandated use of arbitration, requiring allotments of military pay for loan repayment, and imposing prepayment penalties. Penalties & resources Failure to follow the MLA rule can result in: • Noncomplying notes or credit agreements being void from inception • Monetary penalties, including punitive damages • Reputation damage (e.g., for “overcharging” military members) The 2015 MLA rule is available at https://www.govinfo.gov/ content/pkg/FR-2015-07-22/pdf/2015-17480.pdf. In 2016, the DoD issued an Interpretive Rule that answers a number of questions that have been posited to the department about its 2015 rule, and this interpretive document can be found at https://www.govinfo.gov/content/pkg/FR-2016-08-26/pdf/201620486.pdf. The DoD updated its Interpretive Rule in December 2017 by revising three answers and adding one new question and answer, which can be accessed at https://www.govinfo.gov/ content/pkg/FR-2017-12-14/pdf/2017-26974.pdf. Another resource useful to lenders is an MLA Flowchart issued by the Consumer Financial Protection Bureau (CFPB), available at https://files.consumerfinance.gov/f/documents/cfpb_ servicemembers_mla-applicability-flow-chart.pdf. William J. Showalter, CRCM, CRP, is a Senior Consultant with Young & Associates, Inc. (younginc.com), with over 35 years experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also develops and conducts compliance training programs for individual banks and their trade associations and has authored or co-authored numerous compliance publications and articles. Bill can be reached at wshowalter@younginc.com. One area of confusion is in thinking that the MLA is somehow part of the Servicemembers Civil Relief Act (SCRA). While both laws affect lending to members of the military, there are basic differences in when and to what types of credit their protections apply and what those protections are. 9 ISSUE 2 | 2022
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