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FOS Blog

14 Sep

What does the Military Lending Act have to do with “Customer Due Diligence”?

What does the Military Lending Act have to do with “Customer Due Diligence”?

The Department of Defense released its Military Lending Act final rule on July 22, with much of it becoming effective on October 1, 2015 with mandatory compliance by October 3, 2016.  (  The largest consideration is the expansion of coverage from what was formerly known as JWNDA (John Warner National Defense Act).  The former JWNDA narrowly covered:

  • Payday Loans (Closed end credit for 91 days or less up to $2,000)
  • Vehicle Title Loans (Closed end credit for 181 days or less secured by title to a motorized vehicle)
  • Tax Refund Anticipation Loans (Closed end credit where a tax refund is provided by a creditor).

Most financial institutions paid minimal attention to this regulation because it had little to no impact on their consumer loan products.  But the new “Military Lending Act” greatly expands the definition of “consumer credit” to be consistent with credit that is subject to the Truth in Lending Act.  It now applies to all forms of:

  • Vehicle title loans;
  • Installment loans;
  • Unsecured open-end lines of credit;
  • Payday loans;
  • Refund anticipation loans,
  • Credit cards; and
  • Deposit advance products.

If subject, the loans will require the calculation of MAPR – Military Annual Percentage Rate – which cannot exceed a 36% rate cap.  There will be additional disclosure requirements and restrictions on refinancing these loans.

So which customers are covered and how will it affect banking operations?
A “covered borrower” is a consumer who, at the time he/she establishes an account for consumer credit, is a covered member of the military or a dependent of a covered member.  A “covered member” of the armed forces is one who is serving as:

  • Active duty under a call or order that does not specify a period of 30 days or fewer; or
  • Active Guard and Reserve duty.

Those institutions around military bases are familiar with active duty persons/orders and accustomed to compliance issues.  But many Guards and Reservists live in our communities and could also give rise to MLA implications.

How do you know who those persons are?
According to Section 232.5 of the MLA, a creditor is free to apply their own method of determining whether a consumer is a “covered borrower” but there is a safe harbor if one of two methods is used:

  • Searching the DoD database at prior to any extension of credit.  It requires the consumer’s last name, date of birth, and Social Security number.  This method must be used before establishing credit and expressly prohibits a historic look back after credit has been established to determine whether the applicant was a covered borrower.
  • Verifying status by using a statement, code, or similar indicator found in a consumer report from a nationwide consumer reporting agency.

The creditor must “create and thereafter maintain(s) a record of the information so obtained.”

How are you planning to address this issue in your BSA/AML/CIP and Lending Policies?  Do you need to modify individual customer risk assessments or risk ratings?  Food for thought, isn’t it?

For additional assistance, please contact one of our compliance team professionals or email the author Evelyn I. Dehmey at

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