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Military Lending Act Rule; Changes You Need to Know About

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The DoD has issued amended and added Q&As from the DoD Military Lending Act (MLA) Interpretive Rule issued August 26, 2016.  We have included from the Federal Register the amended and added Q&As with bold areas in regard to the amended interpretive rule.  See the amended Q&As 2, 17, and 18 and the added Q&A 20 taken from the DoD Rule 12/14/2017 listed below:

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Military Lending Act Limitations on Terms of Consumer Credit Extended to Service Members and Dependents

A Rule by the Defense Department on 12/14/2017

 

The DoD published an interpretive rule (81 fR 58840, August 26, 2016) to provide guidance on certain questions that the DoD received regarding compliance with the rule.  On December 14, 2017, the DOD published an amendment to this interpretive rule revising the Q&As 2, 17, and 18 and adding a new Q&A 20.

  1. Does credit that a creditor extends for the purpose of purchasing a motor vehicle or personal property, which secures the credit, fall within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property?

Answer: The answer will depend on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance. Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.

Section 232.3(f)(1) defines “consumer credit” as credit offered or extended to a covered borrower primarily for personal, family, or household purposes that is subject to a finance charge or payable by written agreement in more than four installments. Section 232.3(f)(2) provides a list of exceptions to paragraph (f)(1), including an exception for any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased and an exception for any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased

A credit transaction that finances the object itself, as well as any costs expressly related to that object, is covered by the exceptions in §232.3(f)(2)(ii) and (iii), provided it does not also finance any credit-related product or service. For example, a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle), and also finances optional leather seats within that vehicle and an extended warranty for service of that vehicle is eligible for the exception under §232.3(f)(2)(ii). Moreover, if a covered borrower trades in a motor vehicle with negative equity as part of the purchase of another motor vehicle, and the credit transaction to purchase the second vehicle includes financing to repay the credit on the trade-in vehicle, the entire credit transaction is eligible for the exception under §232.3(f)(2)(ii) because the trade-in of the first motor vehicle is expressly related to the purchase of the second motor vehicle. Similarly, a credit transaction that finances the purchase of an appliance (and is secured by that appliance), and also finances the delivery and installation of that appliance, is eligible for the exception under §232.3(f)(2)(iii).

In contrast, a credit transaction that also finances a credit-related product or service rather than a product or service expressly related to the motor vehicle or personal property is not eligible for the exceptions under §232.3(f)(2)(ii) and (iii). For example, a credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception under §232.3(f)(2)(ii) or (iii). Similarly, a hybrid purchase money and cash advance credit transaction is not expressly intended to finance the purchase of a motor vehicle or personal property because the credit transaction provides additional financing that is unrelated to the purchase. Therefore, any credit transaction that provides purchase money secured financing of a motor vehicle or personal property along with additional “cashout” financing is not eligible for the exceptions under §232.3(f)(2)(ii) and (iii) and must comply with the provisions set forth in the MLA regulation.

  1. Does the limitation in §232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from granting a security interest to a creditor in the covered borrower’s checking, savings or other financial account?

Answer: No. The prohibition in § 232.8(e) does not prohibit covered borrowers from granting a security interest to a creditor in the covered borrower’s checking, savings, or other financial account, provided that it is not otherwise prohibited by other applicable law and the creditor complies with all other provisions of the MLA regulation, including the limitation on the MAPR to 36 percent. As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) prohibits a creditor from using the borrower’s account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a post-dated check provided at or around the time credit is extended.

Section 232.8(e)(3) further clarifies that covered borrowers may convey security interests in checking, savings, or other financial accounts by describing a permissible security interest granted by covered borrowers. Borrowers may convey security interests for all types of consumer credit covered by the MLA regulation.

Creditors should also note, however, that 32 CFR 232.7(a) provides that the MLA does not preempt any State or Federal law, rule or regulation to the extent that such law, rule or regulation provides greater protection to covered borrowers than the protections provided by the MLA. For example, although the MLA regulation does not prohibit borrowers from conveying security interests in all types of consumer credit covered by the regulation, including credit card accounts, such accounts may also be subject to other laws, rules and regulations governing offsets and security interests. See, e.g., 12 CFR 1026.12(d).


  1. Does the limitation in §
    232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit a creditor from exercising a statutory right, or a right arising out of a security interest a borrower grants to a creditor, to take a security interest in funds deposited within a covered borrower’s account at any time?

Answer: No. In addition to the security interests granted by borrowers to creditors, as discussed in Question and Answer #17 of these Interpretations, above, under certain circumstances Federal or State statutes may grant creditors statutory liens on funds deposited within covered borrowers’ asset accounts. Section 232.8(e) does not prohibit a creditor from exercising rights to take a security interest in funds deposited into a covered borrower’s account at any time, including enforcing statutory liens, provided that it is not otherwise prohibited by other applicable law and the creditor complies with all other provisions of the MLA regulation, including the limitation on the MAPR to 36 percent. For example, under 12 U.S.C. 1757(11) Federal credit unions may “enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him.”

As discussed in Question and Answer #16 of these Interpretations, §232.8(e) serves to prohibit a creditor from using the borrower’s account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a postdated check provided at or around the time credit is extended. Section 232.8(e)(3) describes a permissible activity under §232.8(e). However, the fact that §232.8(e)(3) specifies a particular time when a creditor may take a security interest in funds deposited in an account does not change the general effect of the prohibition in §232.8(e). Therefore, §232.8(e) does not impede a creditor from—for example—exercising a statutory right to take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by other applicable law and the creditor complies with all other provisions of the MLA regulation, including the limitation on the MAPR to 36 percent.

Creditors may exercise the right to take a security interest in funds deposited into a covered borrower’s account in connection with all types of consumer credit covered by the MLA regulation, including credit card accounts, provided the creditor’s actions are not prohibited by other State or Federal law, rule or regulation that provides greater protection to covered borrowers than the protections provided in the MLA. For example, although the MLA regulation does not prohibit borrowers from conveying security interests in all types of consumer credit covered by the regulation, including credit card accounts, such accounts may also be subject to other laws, rules and regulations governing offsets and security interests. See, e.g., 12 CFR 1026.12(d).

  1. To qualify for the optional safe harbor under 32 CFR 232.5(b)(3), must the creditor determine the consumer’s covered borrower status simultaneously with the consumer’s submission of an application for consumer credit or exactly 30 days prior?

Answer: No. Section 232.5(b)(3)(i) and (ii) permit the creditor to qualify for the safe harbor when it makes a timely determination regarding the status of a consumer at the time the consumer either initiates the transaction or submits an application to establish an account, or anytime during a 30-day period of time prior to such action. Therefore, a creditor qualifies for the safe harbor under § 232.5(b) when the qualified covered borrower check that the creditor relies on is conducted at the time a consumer initiates a credit transaction or applies to establish an account, or up to 30 days prior to the action taken by the consumer. Similarly, the timing provisions in § 232.5(b)(3)(i) and (ii) permit a creditor to qualify for the safe harbor when it conducts a qualified covered borrower check simultaneously with the initiation of the transaction or submission of an application by the consumer or during the course of the creditor’s processing of that application for consumer credit.

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Additional information may be found at https://www.federalregister.gov/documents/2017/12/14/2017-26974/military-lending-act

Examples related to Question #2 are listed below and were discussed in a recent Webinar presented by “ProBank Austin” on February 8, 2018.

Examples of a credit transaction that also finances a credit-related product or service not related to the motor vehicle are:  GAP insurance, Debt Cancellation insurance, Credit Life and Accident insurance, Vendor’s Single Interest Policy or Lenders’ Single Interest Program (Both of which are for the protection of the Lender).  Additionally, a loan for the purchase of a vehicle where the funds will be used to buy the car but also pay for expenses such as a vacation, payoff a debt, medical expenses, etc. will make the transaction ineligible for the exception.

We strive to keep banks up-to-date within the changing regulatory environment.  If you have questions or need clarification don’t hesitate to contact us.

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