Financial Institutions I OCTOBER 12, 2017

Avoidance of Military Lending Act Compliance Raises Fair Lending Risk

Military men departing in uniform

An increased fair lending risk may be emerging in the financial services industry due to the compliance burdens imposed by the 2015 and 2017 amendments to the Military Lending Act (MLA). Service members and their dependents may be denied credit due to these burdens, with the defense being that military status is not a protected class under Regulation B (which implements the Equal Credit Opportunity Act).

Noncompliance with the MLA is not always motivated by the avoidance of burden, however. Some financial institutions genuinely believe they are not providing financial services to any servicemembers who would be afforded protections under the Act. “Covered borrowers” under the MLA include active duty members of the Army, Navy, Air Force and Marines, National Guard Reserves, as well as their dependents. This belief is not only unreasonable, it does not serve to mitigate the potential fair lending risk; not to mention the very high risk of violating the MLA by ignoring the requirements altogether.

The MLA was enacted in 2007 to afford protections to servicemembers and their dependents from the abuses associated with payday loans, vehicle title loans and tax refund anticipation loans. Among other provisions, the MLA provides a cap on the annual percentage rate, called the “Military Annual Percentage Rate” or “MAPR,” of 36 percent.

MLA protections were expanded in 2015 to include most non-mortgage consumer credit transactions under Regulation Z (which implements the Truth in Lending Act [TILA]). The amendment also expanded the fees and charges into the MAPR calculation not normally included in the finance charge for consumer credit under TILA or Regulation Z. Beginning on October 3, 2017, the MLA provisions now include credit card accounts, and only excludes certain credit card fees and charges from the MAPR if they are “bona fide” and “reasonable.”

Under the MLA, creditors bear the burden of determining “covered borrower” status prior to consummating a loan with servicemembers and their dependents while the servicemember is on active duty status.

The compliance burden of the MLA on financial institutions is not light. But while it may be true that military status is not a protected class, the fair lending risk of disparate treatment increases exponentially if the servicemembers and their dependents denied credit can claim discrimination based on race, national origin, religion, sex, marital status, public assistance or the exercise of rights under the Consumer Credit Protection Act. A defense that denial was based on military status is not an effective strategy, as such a defense will likely do as much reputational damage to the institution as the claim.

If these types of activities increase, it won’t be long before new fair lending protections are afforded to servicemembers and their dependents. In the meantime, if consumer credit products are offered at your institution, MLA compliance is not optional.