Just when you thought the business of issuing credit cards couldn't become more complicated, Military Lending Act restrictions enter the picture. Designed to protect our nation's active-duty service members from onerous interest rates, the MLA also applies to family members of military personnel, including those on active guard or active reserve duty.
Although the majority of the expanded MLA went into effect Oct. 1, 2016, credit cards were exempt for the first year. That year is about up. There are several important factors credit union cards teams should consider as the MLA credit card restrictions go into effect on Oct. 3, 2017.
It's important for credit unions to know the requirements of the rule are complex and will be difficult to translate into operational processes. In other words, if you haven't designated an individual or partnered with a consultant to get your arms wrapped around the rule, now is the time.
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Here's an example. Even a small fee could potentially exceed the new military annual percentage rate (MAPR) limit of 36%. That's because credit union issuers will be required to calculate and comply with the MAPR limit every statement cycle. Depending on the cardholder's pattern of spending, a fee could be pushed out of compliance from one month to the next.
What's more, the Department of Defense has stipulated a wide range of fees must be calculated in the 36% max MAPR, even those for ancillary credit products like debt protection. Think of the MAPR as an all-inclusive APR – one that doesn't recognize all of Reg Z's exceptions. In doing so, the DOD has effectively prohibited the deployment of noninterest income opportunities within the credit card portfolio because their fees would likely exceed the MAPR threshold.
It's true these so-called add-on products have earned something of a sketchy reputation, but that's largely due to the deceptive marketing of such products, rather than the products themselves. When fairly priced and marketed ethically, ancillary products can be a good option for some families. Undoubtedly, products like payment protection offered by credit unions are a much better alternative than those offered by predatory lenders and other alternative financial providers. Credit monitoring and identity theft protection, too, can be important especially for military personnel who are often targets of identity thieves because of their government benefits, including health care.
Another example of the rule's complexity is found in the bona fide fee exception. This portion of the rule basically says an issuer can exclude fees from the MAPR if they are reasonable. Taking advantage of this concession requires adherence to very complicated stipulations, which may force some credit unions to simply ignore it. Doing so could have a negative impact on revenue, particularly for those cooperatives with a lot of active military credit cardholders.
Also, credit unions are very rarely the only entity setting strategy, making decisions and handling the day-to-day activities of credit card portfolio management. Many cooperatives are significantly dependent on third-party vendors to process payments. Yet, examiners insist, the buck stops with the issuer. Therefore, credit unions must perform their third-party due diligence to ensure their partners are indeed implementing the necessary processes to comply with MLA rules.
There is some scuttlebutt about an extension of the credit card exemption to the October 2016 final rule. However, credit unions should forge ahead, planning on the Oct. 3, 2017, date as if it's set in stone. Especially when you factor in all the work that needs to be accomplished in partnership with vendors, getting ready for this complex rule could take many months.
Delaying your understanding and implementation of the rule opens all kinds of doors for potential trouble. The consequences of non-compliance, including actual and punitive damages, not to mention the hard costs to dispute claims and the soft costs of a burned reputation, are too risky.
Cindy Williams is Vice President, Regulatory Compliance for PolicyWorks. She can be reached at 515-221-1850 or [email protected].
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