I. INTRODUCTION
The Department of Defense has issued its final rule implementing the Payday Lending provisions of the 2007 Defense Authorization Act. The final rule will apply to transactions consummated on or after October 1, 2007, and imposes a 36% cap (inclusive of all fees) on closed-end credit to active-duty military personnel and their dependents.
II. COVERED LENDERS AND BORROWERS
A. Covered Lenders
The final rule applies to all persons engaged in the business of extending consumer credit and their assignees.
B. Covered Borrowers
Covered borrowers generally include (a)all persons who are regular or reserve members of the military (Army, Navy, Marine Corps, Air Force or Coast Guard) serving on active duty under a call or order that does not specify a period of thirty days or fewer; and (b) any spouse, child, or dependent (an individual for whom the member provided more than one-half of the individual’s support for 180 days immediately preceding an extension of consumer credit covered by the final rule) of such a person. Creditors may rely on representations made by a loan applicant that he or she is not a covered borrower (member, spouse, child, or dependent of a member), unless the creditor has determined through optional verification procedures that a person is entitled to the protections of the rule. The final rule provides a “covered borrower identification statement” that a creditor may provide to the loan applicant that may be signed by the applicant indicating that he or she is not a covered borrower. Statements substantially similar to the following may be utilized by creditors:
I AM a regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer.
I AM a dependent of a member of the Armed Forces on active duty as described above, because I am the member’s spouse, the member’s child under the age of eighteen years old, or I am an individual for whom the member provided more than one-half of my financial support for 180 days immediately preceding today’s date.
-OR-
I AM NOT a regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer (or a dependent of such a member).
III. COVERED LOANS-CONSUMER CREDIT
The regulation applies solely to the following types of consumer credit:
Consumer credit does not include:
IV. PERMISSIBLE RATE OF INTEREST
Loans that are covered are subject to a maximum “military APR” (MAPR) of 36%. The MAPR includes:
The MAPR does not include:
V. MANDATORY DISCLOSURES
The final rule prescribes mandatory disclosures for covered loans. The following will be required to be disclosed clearly and conspicuously before consummation of the consumer credit transaction and must be disclosed both orally and in writing:
The final rule requires creditors to provide extensive disclosures to covered borrowers in written and oral form. Creditors must provide the following information orally and in writing before the issuance of the credit: (a) a statement of the MAPR applicable to the extension of credit; (b) any disclosures required by Regulation Z; and (c) a clear description of the payment obligation of the servicemembers or dependent.
Creditors may satisfy the MAPR statement requirement by describing the charges the creditor may impose relating to the consumer credit to calculate the MAPR. The creditor is not required to describe the MAPR as a numerical value or to describe the total dollar amount of all charges in the MARP that apply to the extension of consumer credit. The MAPR statement applicable to the consumer credit may be included in the agreement with the covered borrower involving the consumer credit transaction.
To be provided orally, the disclosures must be made in person or through a toll-free number. The toll-free number must be provided on (1) the application form or (2) with the written disclosures described above.
VI. PROHIBITED PRACTICES
The final rule prohibits the following:
VII. PENALTIES
Violations of the final rule may result in criminal fines and/or imprisonment for up to one year, the voiding of affected contracts, and any other remedy available under state and federal law.