DoD issues MLA interpretive rule

The Department of Defense (DoD) has issued an interpretive rule to assist the industry in complying with its July 2015 final rule amending the Military Lending Act’s implementing regulation.  The much-anticipated guidance was published in the Federal Register on August 26, 2016, just over one month before the final rule’s October 3 compliance deadline for most products other than credit cards.

The DoD consulted with the CFPB in developing the final rule, and the CFPB actively supported the DoD’s plans to expand MLA coverage.  The CFPB has authority to enforce the MLA against lenders as to whom it has TILA enforcement authority and can examine lenders as to whom it has supervisory authority for MLA compliance.

The interpretive rule consists of a series of 19 questions and answers that, according to the DoD, “represent official interpretations of the Department.”  The DoD also states that the interpretive rule “provides guidance on certain questions the Department has received regarding compliance with the July 2015 Final Rule” and “does not substantively change the regulation implementing the MLA, but rather merely states the Department’s preexisting interpretations of an existing regulation.”  In connection with the interpretive rule, the American Bankers Association (ABA) has made suggestions to representatives of the CFPB, Fed, OCC and FDIC for how the agencies can use their examination procedures to facilitate MLA compliance.  Several of those suggestions are noted below.

Highlights of the interpretive rule include the following:

• Scope of purchase money exception.  The MLA rule exempts a credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.  The interpretive rule states that the exception is limited to a loan that finances “only the acquisition of personal property” and does not apply to a “credit transaction that provides purchase money secured financing of personal property with additional ‘cash out’ financing.”  The ABA suggests that examiners “should distinguish attempts to circumvent the MLA rule through phony ‘secured’ transactions from legitimate secured loans that include financing for incidental expenses related to the underlying purchase, such as shipping and delivery charges, taxes, warranties, and other services directly connected to the transaction.  Therefore, the latter loans would qualify for the exemption so long as they meet the regulatory requirements for exclusion (i.e., are expressly intended to finance the purchase of the personal property and are secured by the personal property being purchased).”  The ABA believes this approach should also apply to “vehicle” purchase loans.
• Oral disclosures.  The MLA rule requires a creditor to provide to a covered borrower, before or at the time the borrower becomes obligated on the transaction or establishes an account for consumer credit, a clear description of the covered borrower’s payment obligation.  A creditor can satisfy this requirement by providing the information orally in a payment schedule or account-opening disclosure.  The interpretive rule states that “an oral recitation of the payment schedule or account-opening disclosure is not the only way a creditor” can comply.  It provides that a creditor “may also orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow.”  The interpretive rule also states that “a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.”
• Prohibited terms.  The MLA rule makes it unlawful for a creditor to extend consumer credit to a covered borrower pursuant to a credit agreement that includes certain terms, such as a mandatory arbitration provision.  The interpretive rule states that a creditor can use a single credit agreement for both covered and non-covered borrowers, provided that “the agreement includes a contractual ‘savings clause’ limiting the application of the proscribed term to only non-covered borrowers, consistent with any other applicable law.”
• MAPR 36 percent limit.  The MLA rule prohibits a creditor from imposing a military annual percentage rate (MAPR) greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit.  The interpretive rule recognizes that a covered borrower’s use of an open-end account could result in fees and/or periodic charges that would cause the MAPR to exceed 36 percent.  It states that “nothing in [the MLA rule] prohibits a creditor from complying by waiving fees or finance charges, either in whole or in part, in order to reduce the MAPR to 36 percent or below in a given billing cycle.”
• Limitation on use of checks and other access methods.  The MLA rule prohibits a creditor from extending consumer credit to a covered borrower with respect to which the creditor uses a check or other method of access to a deposit, savings,or other financial account maintained by the covered borrower.  The interpretive rule states that the prohibition makes it unlawful for a creditor to use a borrower’s account information to create a remotely created check or remotely created payment order to collect payments or to use a post-dated check provided at or around the time that credit is extended.  It provides that the prohibition does not prevent a covered borrower from tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor (including authorizing automatically recurring payments in compliance with the EFTA and Regulation E) or from granting a security interest to a creditor in the covered borrower’s checking, savings or other financial account. The interpretive rule further provides that the prohibition does not prevent a creditor from exercising a statutory right under federal or state law to take a security interest in funds deposited in a covered borrower’s account.   The ABA suggests that MLA examination procedures make clear that there is no limit on the timing of when a creditor can take a security interest.
• Safe harbor for assignees.  The MLA rule provides a safe harbor for a creditor that determines a consumer’s military status using the DoD database or a credit report.  The interpretive rule states that the safe harbor extends to a creditor’s assignee “provided that that the assignee continues to maintain the record created by the creditor that initially extended the credit.”

In addition to providing suggestions for MLA examination procedures, the ABA, joined by six other prominent industry trade groups, recently wrote to the CFPB and federal banking agencies (Fed, OCC, FDIC, NCUA) seeking to postpone by six months the date on which examiners will begin transactional testing of depository institutions for compliance with the MLA final rule.