Defining “Credit-Related Ancillary Products” under the U.S. Department of Defense’s MLA Rule
Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Good morning to all of you out there in regulatory compliance land. Recently, we have received quite a few questions asking whether specific products offered by credit unions are considered credit-related ancillary product[s] for purposes of calculating the military annual percentage rate (MAPR) under the U.S. Department of Defense's (Department) Military Lending Act Rule (MLA Rule). While the MLA Rule itself does not offer a clear answer on what types of products are considered credit-related ancillary products, some insights can be gleaned from the rule's regulatory history.
In its Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents (Aug, 9, 2006), which was a catalyst for the Military Lending Act, the Department expressed general concerns with loan packing, a practice by which creditors can increase the amount financed on a closed-end loan or the minimum periodic payment on an open-end line of credit by selling multiple ancillary products in connection with the extension of credit that may not provide actual benefits to covered borrowers. Some disreputable lenders have used the sale of ancillary products as a way to evade state usury laws by charging high prices and providing few, if any, of the contracted for ancillary services.
The Military Lending Act reflects this concern by defining interest broadly to include premiums and fees related to many different types of ancillary products that are typically excluded from the definition of finance charge in the Truth in Lending Act. Compare, 10 U.S.C. 987(i)(3) with 15 U.S.C. 1605(b) and (c). In fact, the Department relied on this distinction between these two statutes when it rejected requests from industry stakeholders to align the definition of MAPR in Section 232.4 of the MLA Rule with the definition of APR in Regulation Z as part of its original rulemaking in 2007. See, 72 Fed. Reg. 50580, 50587 (Aug. 31, 2007).
Since the MAPR is designed to be more inclusive than the APR, a good starting point for determining what ancillary products are included in the MAPR may be to consider which ancillary products are excluded from the APR. In addition to creating exclusions from the definition of finance charge for certain voluntary credit insurance premiums and debt cancellation or suspension fees, which are addressed in paragraphs (c)(1)(i) and (ii) of Section 232.4 of the MLA Rule respectively, Regulation Z excludes property insurance premiums designed to protect against loss of or damage to property, or against liability arising out of the ownership or use of property. See, 12 C.F.R. 1026.4(d)(2).
Unlike guaranteed automobile protection (GAP) insurance, which is treated as a form of debt cancellation insurance, credit property insurance insures the collateral securing the loan rather than making up the difference between the amount owed on the loan and the amount recovered from a traditional property insurer. If the purpose of including premiums and fees for credit-related ancillary products is to prevent creditors from evading the 36 percent usury cap by including low interest rates with high fees associated with origination, membership, or other cost that may not be captured in the TILA definition of APR, then these types of property insurance premiums are likely folded back into the MAPR as credit-related ancillary products even though they are excluded from the APR under Regulation Z. 72 Fed. Reg. at 50587.
Some other products that are also likely folded back into the MAPR as credit-related ancillary products include credit card add-on products such as payment protection, identity theft protection, and credit monitoring. While these products may provide value to some consumers, recent CFPB enforcement actions have shown that these credit card add-on products can potentially allow disreputable lenders to increase the cost of credit without providing any benefit to the borrower. See, In re Affinion Group Holdings, Inc., et al. Since these fees increase the real cost of credit and may not provide an offsetting benefit to the borrower, it is likely that they are also included in the MAPR as credit-related ancillary products.
While these examples may provide some guideposts for credit unions to use to determine whether or not a product is likely a credit-related ancillary product, one thing to note is that the Department has also indicated that intends the MAPR to capture goods or services that may not typically be considered interest but that some payday lenders have used as stand-ins for interest:
Some industry respondents were concerned about including costs in the MAPR that are associated with the extension of consumer credit because this may include costs for products or services that are purchased in connection with a loan, but are not required. For example, industry respondents argue that ancillary products (such as voluntary credit insurance and debt cancellation coverage) should not be included in the MAPR calculation because these products may protect borrowers against being burdened with debt if a covered event occurs.
The Department believes the definition is consistent with the statute and is appropriate in the context of the consumer credit covered by the rule. The Department is concerned that Service members are sold products such as voluntary insurance without having these credit insurance products placed in the context of the Service member's employment status or his or her current level of insurance coverage. Additionally, the Department is concerned about small loans that are associated with sales of products or services not related to the loans, such as credit offered as part of Internet access or catalog sales. The definition has been designed to cover sales such as these or sales similar to those mentioned in this paragraph and considers them associated with the extension of consumer credit.
Id. For example, at least one payday lender has attempted to disguise itself as an internet service provider. The company in question offered subscribers a cash rebate against which the subscriber would pay periodic fees in order to use the internet by appointment at the payday lender's locations. Other payday lenders have sold certificates that would allow borrowers to purchase items from catalogs as well as receive a small dollar loans. Since these products are related to the extension of credit and increase the real cost of credit without providing much benefit to the borrower, the Department makes clear that they must be included in the MAPR calculation.
If there is any unifying principle that can be derived from these examples, it is that the Department intends the term credit-related ancillary products to include most products and services sold in connection with an extension of credit that it fees increase the real cost of credit to covered borrowers without providing offsetting benefits. This includes goods and services, such as internet service, that some disreputable lenders have used as stand-ins for interest. Hopefully this blog has provided some clarity on this issue, but it seems like every product must be analyzed on a case-by-case basis consistent with the principles announced by the Department in various preambles and reports.
DoD Military Lending Act Interpretive Guidance Released
The DoD published its interpretative guidance on August 26, 2016 in the Federal Register that may have changed our analysis. NAFCU's Regulatory Compliance team will update the association's MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.