Financial Institutions: Make Sense of the DoD’s MLA Guidance Updates
The Department of Defense’s (DoD) Military Lending Act (MLA) rule officially went into effect October 3, 2016. During the months leading up to its compliance date and the time it has been in effect, the rule’s numerous grey areas have plagued financial institutions attempting to comply with its unclear requirements.
In response, the DoD issued question-and-answer guidance on August 26, 2016. While this clarified some aspects of the rule, it muddied the waters for others. In an attempt to provide further clarification, a second guiding document was released on December 14, 2017.
To break it down, the new guidance addresses three areas you should know about:
- Exemptions related to loans secured by automobiles or other secured personal property
- Security interests in deposit accounts
- Safe harbor clarifications for determining covered borrower status
Exemptions for auto or personal property loans
According to the updated guidance, a purchase money transaction can retain its exemption from MLA requirements, even though the amount financed may exceed the actual purchase price of the property. For example, a consumer may finance additional items, such as leather seats or extended warranties, in addition to the purchase price of an auto loan and still retain the exemption from MLA requirements.
Negative equity situations can also still retain exemption. For example, a consumer subject to MLA may choose to trade in a vehicle that still has an outstanding loan on it. If the trade-in value is not enough to pay off the existing loan, the consumer may use proceeds from the new auto loan to cover the deficiency and still be exempt from MLA requirements.
Exemption removed under certain circumstances
Of course, there are circumstances when additional financing will remove the exemption and apply MLA requirements. In general, the exemption is removed in situations where the borrower obtains a loan to purchase an automobile that exceeds the purchase price and keeps the additional money or uses it for something unrelated to the purchase of the car. Financing credit-related products such as Guaranteed Auto Protection (GAP) insurance or a credit insurance premium would remove the exemption and require the financial institution to adhere to MLA requirements. Cash out transactions also requires institutions to follow rule requirements.
Your institution will need to address MLA requirements in these situations where you finance GAP or other credit insurance in association with a MLA covered borrower. This will start with ensuring that you have a process to complete MLA status checks on all potential covered loans — you can no longer assume that an auto loan is exempt from coverage. Second, you will need to ensure your loan documents are set up to provide the required Military Annual Percentage Rate (MAPR) disclosures along with these covered loans. Finally, you will need to ensure your system is set up to calculate the MAPR for these loans.
Ensuring that all of these areas are addressed can be especially tricky with indirect auto loans where dealers offer GAP or other credit insurance. Many indirect dealers are not set up to calculate MAPR and provide the necessary disclosures. Some financial institutions are working with the dealers to provide MAPR calculations on their behalf, as a well as MAPR disclosures. Your institution will need to reach out to those dealers or networks to determine how these types of MLA-covered loans will be handled.
Taking security interests in deposit accounts
The general MLA rule limits creditors using a check or other payment method to access a deposit, savings, or other financial account maintained by a covered borrower. The DoD’s second amendment to the guidance clarifies that this limit does not prohibit a covered borrower from granting a security interest in a deposit-related account. Specifically, the DoD indicates that an institution may take a security interest in a borrower’s checking, savings, or certificate account. With the new amendment, creditors may offer deposit or certificate secured loans to MLA covered borrowers.
Furthermore, the DoD clarified that the MLA rule does not prohibit creditors from taking a statutory lien on funds deposited into a covered borrower’s deposit account. Likewise, the rule does not prohibit a financial institution from taking a statutory lien on deposits.
Safe harbor for determining covered borrower status
The original rule implied that you could maintain the safe harbor for checking covered borrower status if you made the check at the time of application submission, or exactly 30 days prior to application. The DoD’s second amendment clarifies that the safe harbor applies if you make your determination at application or “anytime during a 30-day period of time prior to such action.” Accordingly, you may rely on a previous MLA-covered borrower check as long as it was done no more than 30 days prior to the application.
How we can help
You don’t have to decipher the MLA guidance alone. CliftonLarsonAllen’s (CLA) compliance team can assist your financial institution with consulting, audit, and training related to the MLA rule. We work with hundreds of financial institutions across the country reviewing disclosures, procedures, and loan files to help manage MLA compliance, so we know the rules and can help you apply them.