Back to the Future – DoD Reverts MLA Guidance to 2016 Edition
On February 28, 2020 the Department of Defense (DoD) issued a third interpretive rule for its Military Lending Act (MLA) regulations. This adds one more finite question & answer to DoD’s list and reverts to guidance originally issued in 2016. For those not in the weeds on this issue, first we will take a walk down memory lane to help explain what this means for credit union operations.
The original MLA regulations only applied to three kinds of products: payday loans; tax refund anticipation loans; and vehicle title loans, when made to certain servicemembers and their dependents (covered borrowers). Effective October 3, 2016, the DoD expanded the scope of these rules to include most consumer credit products, with certain statutory exceptions including vehicle purchase loans and residential loans. Credit cards became subject to the MLA on October 3, 2017. The MLA includes disclosure requirements and limitations such as a 36% Military Annual Percentage Rate (MAPR) cap. NAFCU members can find comprehensive guidance in our MLA Compliance Guide and our many Compliance Blog posts on this topic can be found here.
Implementing the MLA posed many challenges for credit unions from 2015 to 2017. This was in part because of ambiguities in the rules. As a result, the DoD issued interpretative rules in August 2016 and December 2017, attempting to provide some clarity. Both times, the interpretative rules were helpful in some aspects, yet also created new questions as well.
August 2016 Interpretative Rule
The first interpretive rule answered nineteen questions on issues such as how to calculate the MAPR or how the rule interacted with statutory lien rights. The MLA has an exception for loans that are “expressly intended to finance the purchase of” personal property or motor vehicles, where the loan is secured by the personal property or vehicle being purchased. “Question 2” in particular caused some confusion about the scope of these exceptions. The question read:
Does credit that a creditor extends for the purpose of purchasing personal property, which secures the credit, fall within the exception to “consumer credit” under [the rule] where the creditor simultaneously extends credit in an amount greater than the purchase price?
The DoD’s answer to this question focused on loans that, in part, finance the purchase of personal property, but also have a “cash advance” or “cash-out” component. Specifically, the DoD concluded that the exception only applied where the loan financed “only the acquisition of personal property.”
While this was written specifically about the personal property exemption, it did raise the question of what impact this would have on the exemption for motor vehicle purchase loans. This is because the two exemptions are written with the exact same language, just referencing different kinds of property. The DoD’s interpretation seemed to leave a couple of possible interpretations. One is that this question is very specific in its reference and citation to the personal property exemption, so that is the limit of its applicability. Another possible interpretation is that because these two exemptions are so similar, the analysis seems equally applicable to the motor vehicle purchase exemption and has the potential risk of being cross applied in a dispute, creating litigation risk. Meanwhile, many situations can lead to a vehicle purchase loan that exceeds the purchase price of the vehicle, such as where:
- the borrower is trading in a car that is worth less than what is owed on the vehicle (negative equity);
- the borrower does not have enough cash on hand to pay applicable sales tax, vehicle titling or tag fees, or similar charges;
- the borrower finances the cost of an add-on product like guaranteed asset protection (GAP) insurance.
After hearing concerns about the ambiguity created by question 2, the DoD released an amended version in December 2017.
December 2017 Interpretative Rule
On December 14, 2017 the DoD issued a new interpretive rule that, in part, completely rewrote question 2. NAFCU blogged about this, but in short the new version distinguished between loans that financed credit-related products and loans that financed collateral-related products. Loans that included financing for products like negative equity on a trade-in, warranties or optional leather seats would still be excluded as “expressly intended to finance” the vehicle purchase. However, financing protection products related to the credit instead of the collateral, like GAP insurance or credit insurance, would be considered MLA covered loans.
Adding another wrinkle here, the DoD indicated this interpretative rule was stating “preexisting interpretations of an existing regulation” as opposed to setting an effective date so it seemed retroactive. Also, because only certain creditors, like federally-chartered and state-chartered credit unions are permitted to take a security interest in a motor vehicle under the MLA, this created difficulties for offering products like GAP insurance in some indirect lending programs where the dealer originates the loan.
NAFCU advocated extensively on this issue, and on May 15, 2018 the DoD did submit another amended rule to the Office of Management and Budget for regulatory review. However, nothing published until last week.
February 2020 Interpretive Rule
Finally on February 27, 2020, the DoD issued its third MLA interpretative rule. This reverts question 2 from the December 2017 version to the August 2016 version. This is good news for credit unions in terms of the difficulties presented by the language pulling vehicle purchase loans that finance credit related products into the scope of the MLA. However, it does restore the previous ambiguities about the scope of question 2. In its publication, the DoD indicated this is not the final chapter of this story:
One point raised in the requests for withdrawal was a concern that creditors' would be unable to technically comply with the MLA if the purchase included products not expressly related to the purchase of the vehicle as described in the[December 2017] Q&A #2…, because [the regulation] would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased. The Department finds merit in this concern and agrees additional analysis is warranted. In withdrawing the [December 2017] Q&A #2…, because of unforeseen technical issues…the Department, absent of additional analysis, takes no position on any of the arguments or assertions advanced as a basis for withdrawing the [December 2017] Q&A #2... (Emphasis added.)
This indicates DoD may further consider this issue. NAFCU will continue to advocate for clarity for credit unions and keep members posted on this issue.
New Question 21 – Running Covered Borrower Checks with ITINs
Finally, the February 2020 interpretative rule does add another question that clarifies that credit unions may use individual tax payer identification numbers (ITINs) to perform covered borrower checks. Since some servicemembers or their dependents may not be able to obtain a Social Security number due to their citizenship status, the MLA database for performing MLA covered borrower checks will include ITINs and for the purposes of the rule, the ITIN will serve as the Social Security number.