Second MLA Interpretative Rule– Simultaneous Loan Edition
After months of anticipation, it is finally here: the second set of the MLA Interpretative Rules has arrived. To better understand how this second attempt at interpreting the rule affects the first, it is important to review the first interpretative rule that was released in August of 2016. The first interpretative rule provided substantial guidance but also left many more questions unanswered as we pointed out in our previous MLA blogs. The second set builds upon the first by amending prior guidance on 3 questions and providing an additional question and answer. This blog will focus on one of the most contentious questions raised by credit unions regarding simultaneous purchase and cash-out loans (aka infamous question #2), but look out for Monday's blog that will discuss the rest of the guidance.
As you may remember, question #2 of the 2016 interpretative guidance focused on an exemption for loans that are "expressly intended" to finance the purchase of personal property. The guidance indicated that the MLA rule applies to "hybrid purchase money loans" for personal property, meaning a loan that provides credit in an amount greater than the purchase price is covered by the MLA. To summarize the guidance, any credit transaction that provides purchase money secured financing of personal property along with additional cash-out financing is not eligible for the exception. See, 81 Fed. Reg. 58841.
Because the exceptions for the purchase of personal property and motor vehicles had nearly the same wording, this left many credit unions wondering whether motor vehicle purchase loans that exceed the purchase price of the vehicle could be MLA covered loans. Examples of these kinds of situations could include the financing of negative equity, title, insurance or other add-ons. Guidance published on Thursday provides some clarification, although not all positive.
Negative equity occurs when a member owes more on their loans than the value of the vehicle. Under the MLA rule, if the credit union makes a vehicle loan secured by that vehicle, the loan would be excluded from the MLA rule. The rule clarifies that in cases when the member has a negative equity vehicle loan and wants to roll over the negative equity into a new vehicle loan secured by the vehicle, the loan would still be excluded from the MLA rule even if the credit union lent the member the money needed to pay off the other vehicle loan. Here is a relevant excerpt from the interpretative guidance:
"[I]f 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."
For example, let's say a member's car is worth $12,500 but they owe $15,000 on the car loan. The member wants to finance the purchase of a new car worth $20,000 and also wants to pay off the $2,500 negative equity of the current loan. The dealership offers to purchases their existing vehicle for $12,500 and connects them with Helpful Credit Union who qualifies the member for a $22,500 loan to pay off the negative equity and cover the cost of the new car. In this situation, it was not clear whether the additional funds lent to cover negative equity would now make the transaction a covered loan as funds were advanced for more than just the purchase of the new vehicle; now we know that this is an excluded transaction not covered by the MLA.
Another ambiguity with MLA rule was whether extending credit for a personal or vehicle loan that also financed add-on products (i.e., warranties, upgrades, insurance, etc.) would subject the otherwise exempt loan to MLA protections. The answer to this question gets a bit tricky as it depends on what add-on products the credit union is financing.
The interpretive rule states that "[g]enerally, 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." See, 82 Fed. Reg. 58740. This means that financing costs related to the vehicle or the personal property does not disqualify the loan from the exception, but financing credit-related products or services does.
The interpretative guidance also provides a couple of examples of add-ons which are and are not considered to be "intended to finance the purchase of a vehicle or personal property secured by the vehicle or property being purchased":
Items that can be financed without losing the MLA exception:
- 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 section 232.3(f)(2)(ii).
- 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.
Items that will not qualify for the MLA exception when financed:
- A credit transaction that includes financing for Guaranteed Auto Protection (GAP) insurance or a credit insurance premium.
- Any credit transaction that provides purchase money secured financing of a motor vehicle or personal property along with additional cash-out financing.
This could make it difficult for some MLA covered borrowers to purchase GAP insurance directly from auto dealers as these fees are likely "credit related ancillary products" that are included in the MAPR calculation. These premiums could quickly lead to an MAPR above 36%.
NAFCU previously blogged on credit related ancillary products and insurance issue here that may help you understand which products are "okay" and which products are not for the purposes of retaining the exception. Don't forget that NAFCU members can download our MLA Compliance Guide and related resources here.