MLA Final Rule: Updates based on the August Interpretative Rule
As the Department of Defense’s (DoD) Military Lending Act (MLA) Final Rule (also known as the July 2015 Final Rule) takes effect October 3, 2016, many lenders are still struggling to understand just how these updates will impact them. Are their loans covered? Are they not? Do they need to create two sets of disclosures, one for MLA covered borrowers and another for everyone else?
Among a number of clarifications provided in the DoD’s Interpretive Rule in August, there are two that lenders may want to further review.
Hybrid Purchase Money and “Cash Out” Purchase Money Loans
Lenders should be aware that for Hybrid Purchase Money and “Cash Out” Purchase Money Loans, if the proceeds of a loan exceed the purchase price, the loan may no longer be exempt from MLA regulations.
Excerpt from the MLA Interpretative Rule, Question 2:
- “A hybrid purchase money and cash advance loan is not expressly intended to finance the purchase of personal property, because the loan provides additional financing that is unrelated to the purchase. To qualify for the purchase money exception from the definition of consumer credit, a loan must finance only the acquisition of personal property. Any credit transaction that provides purchase money secured financing of personal property along with additional “cash-out” financing is not eligible for the exception under § 232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.” DoD Interpretive rule, Office of the Secretary, 32 CFR Part 232 [Docket ID: DOD-2013-OS-0133], RIN 0790-ZA11
Example: Hybrid Purchase Money and “Cash Out” Purchase Money Loan
A consumer is buying a new car and trading in a car where they owe more than the value of the trade in. The auto dealer adds the negative value of the trade in to the purchase of the new vehicle and then sells a GAAP policy on the new car. Since the loan finances the payoff of the underwater trade-in and the GAAP policy, the loan is defined as “cash-out”, and the purchase money auto loan is no longer an exempt transaction under the MLA regulation.
Single Credit Agreement
Many creditors lend to both MLA covered borrowers and non-covered borrowers. Questions arose as to the need to create two separate sets of disclosures to ensure compliance with the Final Rule. The Interpretive Rule states that creditors can use a single set of disclosure documents for covered and non-covered borrowers, if the disclosure contains a “savings” clause excluding covered borrowers from terms that would otherwise be applicable to non-covered borrowers.
Excerpt from the MLA Interpretative Rule, Question 15:
- “[T]he supplementary information in the July 2015 Final Rule explains that the Department ‘‘recognizes that many creditors likely would adopt disclosures and contract documents that would be designed to be provided to both consumers who are not entitled to the protections under the MLA and to covered borrowers.’’ 10 Under the MLA, a creditor may include a proscribed term under § 232.8, such as a mandatory arbitration clause, within a standard written credit agreement with a covered borrower, provided that the agreement includes a contractual ‘‘savings’’ clause limiting the application of the proscribed term to only non-covered borrowers, consistent with any other applicable law.” DoD Interpretive rule, Office of the Secretary, 32 CFR Part 232 [Docket ID: DOD-2013-OS-0133], RIN 0790-ZA11
Don’t be caught off guard. Consult with your legal and compliance sources to ensure that you are adequately covered
The information in this article is not to be relied upon, is not intended to be, nor should it be used or construed as, legal advice. Equifax assumes no liability for any errors or omissions in the information in this article. Compliance with the consumer protection laws and regulations is the responsibility of each entity to which such laws apply. All specific consumer, customer and other third-party examples in this article are fictitious.
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