CUNA Mutual Group Risk Alert: Department of Defense Amends Military Lending Act Interpretive Rule

The Department of Defense (DOD) has amended its interpretive rule for the Military Lending Act (MLA) which impacts certain purchase money loans previously exempted from being covered. The most recent DOD interpretation addresses questions relating to the exemption from coverage for credit expressly intended to finance the purchase of a motor vehicle or personal property, as well as whether a credit union can take a security interest in a covered borrower’s shares in the credit union.

On December 14, 2017, the DOD issued an interpretive rule to provide guidance relating to the July 2015 final rule amending its regulation that implements the Military Lending Act (MLA). The MLA limits the military annual percentage rate (MAPR) that a creditor may charge to a maximum of 36%, requires certain disclosures, and provides other substantive consumer protections on “consumer credit” extended to Service members and their families.

The interpretive rule indicates credit transactions expressly intended to finance the purchase of motor vehicles and personal property, that include financing of credit-related products such as Guaranteed Auto Protection (GAP) or credit insurance, do not qualify for the exclusion from MLA coverage.

Prior to the recent interpretation, taking a security interest in a covered borrower’s existing shares may not have been permissible, as the rule provides: “…If not otherwise prohibited by applicable law, [the creditor may] take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction…” The interpretative rule indicates creditors are not prohibited 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 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. This minimizes concerns regarding the final rule’s text regarding restrictions on security interests in existing shares. Compliant documents used for covered transactions prior to the recent interpretive rule may not have language to support a security interest in all of a covered borrower’s shares, while new documents implemented after the interpretive rule may support such a security interest. This means a credit union may have covered loans with differing security interests in covered borrowers’ shares. Collections staff must be aware of the credit union’s security interest outlined in the agreement with the covered borrower prior to taking shares to satisfy debt.

Risk Mitigation
Credit unions should consider these risk mitigation tips:

• Ensure employees understand which loans are covered by the MLA;
• Confirm all systems and documents provide compliant calculations and disclosures; 
• Determine if current MLA loan documents should be updated to allow for a pledge of shares generally; 
• Require collections staff to carefully review agreements to determine if covered loans have security interest in shares restricted prior to using shares to satisfy debt;
• Train indirect lending staff to recognize if retail installment sales contracts with covered borrowers offered for purchase have credit related products financed negating the previous exception from MLA requirements;
• Determine how you will handle indirect contracts with covered borrowers where the dealership does not appear to have complied with the recent MLA interpretation and create procedural requirements for staff; and
• Watch for changes to MLA requirements.

Risk Prevention Resources
Access CUNA Mutual Group’s Protection Resource Center at cunamutual.com for exclusive risk and compliance resources to assist with your loss control. The Protection Resource Center requires a User ID and password. To learn more, review these resources:

CUNA Mutual Group MLA Web site
• Department of Defense MLA Web site
Military Lending Act Limitations on Terms of Consumer Credit Extended to Service Members and Dependents