DoD Expands Guidance on MLA

Financial Services Law

The Department of Defense (DoD) released a new interpretive rule under the Military Lending Act (MLA), building on prior interpretive guidance.

What happened

Enacted in 2006, the MLA caps the total charge on covered loans to active duty service members at 36 percent per annum (referred to as the Military Annual Percentage Rate (MAPR)), requires disclosures to inform service members of their rights and prohibits the use of arbitration clauses in contracts with service members.

The law also provided the DoD with the power to define the scope of credit covered by the statute. Initially, the agency used a narrow definition of credit that covered only three products. But the Department amended its regulations in July 2015, adopting a far broader scope of coverage that extended the MAPR, the ban on mandatory arbitration, and other limitations to a larger range of credit products for military service members and their families.

Last August, the DoD published an interpretive rule to help financial institutions achieve compliance with the changes.

Seeing the need for clarification on several issues, the agency amended and added to the Q&A guidance to answer questions the Department has received since last year. “This interpretive rule does not change the regulation implementing the MLA, but merely states the Department’s preexisting interpretations of an existing regulation,” the DoD noted.

First, the Department addressed whether credit extended for the purpose of purchasing a motor vehicle or personal property, which secures the credit, falls within the exception to “consumer credit.” The answer depends, the DoD said, on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance.

“Generally, 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,” the agency explained.

For example, a credit transaction that financed the purchase of a motor vehicle (and secured by the vehicle) that also finances optional leather seats within the car and an extended service warranty would be eligible for the exception. Alternatively, the same credit transaction that also included financing the payment for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception.

The DoD also clarified that the prohibition on a creditor using a remotely created or postdated check to access a deposit, savings or other financial account maintained by the covered borrower to collect payments does not prohibit the borrower from granting a security interest to a creditor in the checking, savings or other financial account—provided it is not otherwise prohibited by other applicable law. In this regard, the MLA does not preempt any state or federal law, rule, or regulation that provides greater protections to service members, the Department pointed out, so creditors should ensure compliance across the board.

The DoD reiterated that other state or federal law, rule, or regulation may stand in a creditor’s way, but the rule does permit creditors “to exercise the right to take a security interest in funds deposited into a covered borrower’s account in connection with all types of consumer credit covered by the MLA regulation, including credit card accounts.”

Finally, the amended rule discussed when a creditor is required to check an applicant’s active duty status to obtain the MLA safe harbor, dismissing concerns that it must be conducted simultaneously with the consumer’s submission of an application for consumer credit or exactly 30 days prior.

The regulations “permit the creditor to qualify for the safe harbor when it makes a timely determination regarding the status of a consumer at the time the consumer either initiates the transaction or submits an application to establish an account, or anytime during a 30-day period of time prior to such action,” the DoD wrote. “Therefore, a creditor qualifies for the safe harbor under [the regulations] when the qualified covered borrower check that the creditor relies on is conducted at the time a consumer initiates a credit transaction or applies to establish an account, or up to 30 days prior to the action taken by the consumer.”

To read the DoD’s amended rule, click here.

Why it matters

The DoD’s amended rule took immediate effect on Dec. 14, providing additional guidance to creditors struggling with issues such as the timing of the borrower check for purposes of the safe harbor and the scope of the exception to “consumer credit” for credit extended beyond the purchase price of a motor vehicle or personal property. For a more comprehensive discussion of the Military Lending Act, please see Chapter 15 of the 2017 Consumer Financial Services Answer Book, authored by Manatt partner Richard Gottlieb.