Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/dod/
Timestamp: 2019-04-19 03:12:52+00:00

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DoD’s Interpretive Guidance on MLA: Part III – Definition of "Vehicle"
Earlier this summer, my colleague Stephanie Lyon wrote about the DOD’s failure to define some critical terms in the rule, namely: “vehicle”, dwelling”, and “personal property”. As she explained, these definitions matter, as they helps us determine which loans are included in the MLA’s scope. Well we have some good news- the DOD’s Interpretive Guidance defined one of those terms- "vehicle". That said, the guidance does fall short and still leaves some questions unanswered.
Under 32 CFR 232.3(f)(2)(ii) and 232.8(f) what methods of transportation are included within the definition of a “vehicle”?
Answer: For purposes of the MLA, the term “vehicle” means any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation. The term does not include motor homes, recreational vehicles (RVs), golf carts, or motor scooters.
However, this “clarity” leads to a new question- if they’re not considered vehicles, what are they? Are these considered “personal property?” Well we still don’t know, because we still don’t have a definition for “personal property”. If these are considered personal property, this begs another question. Why would the DOD bother to exclude boats, RVs, etc., from the definition of “vehicle”, just to include them as “personal property” and have them exempted under 232.3(f)(2)(iii)? This is rather perplexing.
Or would they be considered a “dwelling”? The exception for a residential mortgage requires that the credit be “secured by an interest in a dwelling”. While the rule seems to contemplate that a dwelling-secured interest is involved in order for the residential mortgage exception to apply, we still don't have a definition for "dwelling".
As explained above, even with the recently published interpretive guidance, there are still a lot of gray areas. Because of the ambiguity that remains with this category of loans, credit unions are strongly advised to consult with counsel. Indeed, state law may provide helpful guidance. Thus, having counsel familiar with your state’s property law may help avoid some of the risks associated with the ambiguity left by the rule. For example, it is common for states to categorize property as “real property” meaning secured by land, and “personal property” which is often a catch-all for all other property, meaning non-real property.
NAFCU’s Regulatory Compliance Team is continuing to review the guidance to understand its full impact on credit unions and will make necessary updates to our Military Lending Act Guide in the coming weeks. Currently available resources can be found here at our MLA Compliance landing page.
If you are like me, you love definitions. Definitions help me group things together and differentiate between what is covered and what is outside the scope of a rule. As many of you know, the Department of Defense (DoD) recently revised their 2007 Military Lending Act Rule (old MLA Rule). However, a couple of definitions that were a part of the old MLA Rule did not make it into the 2015 MLA Rule (revised MLA Rule). Other terms were never defined by DoD, adding to the rule’s ambiguity. Some of the most noticeable definitions that are missing in both the preamble and the text of the 2015 MLA Rule are: “motor vehicle” and “personal property.” As for those terms never defined, “structure” tops the list.
Loans that are expressly intended to finance the purchase of a motor vehicle or personal property, where the credit is secured by the vehicle or property being purchased.
See, 32 C.F.R. § 232.3(f)(2).
Note that a dwelling does not need to be “attached to real property” which does provide more flexibility in terms of which loans will qualify for the “residential mortgage” exception. However, there does not seem to be any exemption that would apply to a land-only loan.
As for motor vehicles and personal property, DoD did not define these terms. Because the revised MLA Rule excludes loans to purchase a motor vehicle or personal property, credit unions want to know what those terms include. Could this be a loan to purchase a motorcycle, RV, boat, ATV or similar collateral? And if the member lives in the collateral, could it qualify for the residential loan exemption?
For instance, take the purchase of a boat, the category in which the boat falls would determine whether the loan will be a covered loan or excluded. Because there is no definition for a motor vehicle or personal property, a boat could potentially fall under either group. What may be more complicated is if a houseboat is a “dwelling” and thus a residential loan not covered by the revised MLA Rule. See, 32 C.F.R. § 232.3(f)(2)(i)-(iii). This may come down to whether a houseboat could be viewed as a “structure” since that is how the definition of dwelling is framed. Hence a simple boat loan refinance could become a nightmare when determining if the loan falls under the protections of the revised MLA Rule or the exemptions. Fortunately, the scheme is not as complicated for purchase transactions as it appears that a boat could fall under the exclusion as either a motor vehicle, personal property, or a dwelling.
So where can credit unions seek the answer to this dilemma? There are some persuasive sources out there that could help shed light on this messy issue. The old MLA rule for example, discussed the definition of motor vehicles as “vehicles which must be registered pursuant to state law.” While this provision was not preserved in the revised MLA Rule, states generally regulate the use of motor vehicles. Similarly, property law is largely state law, so that may inform what collateral is considered “personal property” or even what might be considered a “structure” for determining the category of a dwelling.
The issue with relying on state law is that there may not be uniformity across jurisdictions, which is challenging especially for credit unions that operate in multiple states. For example, a loan made in California may be considered a covered loan while the same loan made in a state that defines motor vehicles, personal property, or structure differently may not. These inconsistencies may add to the regulatory burden experienced by credit unions that have expansive presences to the point of being disruptive to their lending process.
Overall, the revised MLA Rule is fertile ground for litigation and there are a lot of gray areas if the credit union should unfortunately find itself in court. Hence, credit unions may want to speak to their local counsel to find out more information on what category loans would fall into in the absence of definitions.
The DoD published its interpretative guidance on August 26, 2016 in the Federal Register that may have changed our analysis. NAFCU's Regulatory Compliance team will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.
Coming Soon: Updated MLA Compliance Guide – While NAFCU's MLA Compliance Guide is still fairly new, our members keep asking great questions that we wanted to incorporate into the guide. NAFCU members should keep an eye out for a revised edition soon, we’ll keep you posted. The current edition is available here.
DoD Final Rule: Treatment of fees under MLA & Regulation Z; Programming Note; NAFCU Webcast.
This post is going to primarily focus on the charges included in calculating the Military Annual Percentage Rate (MAPR) as compared to the charges included in Regulation Z’s Annual Percentage Rate (APR).
Regulation Z contains the rules for determining which fees are included in the finance charge to be used when calculating the APR for a consumer credit transaction. In particular, 12 C.F.R. § 1026.4 and its Official Interpretations provide examples of charges that are always included, charges that are included unless conditions are met, and charges that are always excluded. Meanwhile, the Department of Defense’s (DoD’s) final rule modified the MLA to reflect an “all-inclusive” MAPR that is more expansive than Regulation Z. This different approach taken by the MLA causes a stark contrast between how a particular type of fee is treated under the respective rules.
Generally, Regulation Z excludes application fees if charged to all applicants for credit. See, 12 C.F.R. § 1026.4(c)(1). The Official Interpretation defines an application fee as a charge to recover the costs associated with processing applications for credit, such as credit reports, credit investigations, and appraisals. However, if the fee is only charged to applicants who are approved or who actually receive credit, then the application fee may not be excluded from the finance charge.
Under the MLA, “any application fee charged to a covered borrower who applies for consumer credit” is included in the MAPR, except for a bona fide fee charged to a credit card account. See, 32 C.F.R. § 232.4(c)(1)(iii)(B). While there is not a broad exemption like in Regulation Z, the final rule does contain an important caveat: a federal credit union or an insured depository institution may now exclude from the MAPR an application fee charged to a covered borrower when making a short-term, small amount loan (STS loan). However, this exemption is limited to one application fee charged in a rolling 12-month period.
Under Regulation Z, a participation fee is generally excluded from the finance charge. See, 12 C.F.R. § 1026.4(c)(4). However, keep in mind that a one-time, non-recurring fee charged during the opening of the account is not a fee that is charged on a periodic basis and may not be excluded from the finance charge as a participation fee. Regulation Z’s participation fee exemption also does not apply to minimum monthly charges, credit card non-use charges, or other fees based on account activity or the amount of available credit.
Under the MLA, “any fee imposed for participation in any plan for consumer credit” is included in the MAPR, except for a bona fide fee charged to a credit card account. See, 32 C.F.R. § 232.4(c)(1)(iii)(C). The final rule explains that the bona fide fee for participating in a credit card account may be “reasonable” if the fee amount corresponds to either the credit limit in effect or the credit made available when the fee is imposed, the services offered under the credit card account, or other factors relating to the credit card account. See, 32 C.F.R. § 232.4(d)(3)(iv) For example, even if other creditors typically charge $100 per year participation fee for credit card accounts, a $400 per year participation fee may still be reasonable if (relative to the other accounts) the credit made available to the covered borrower is significantly higher or additional services and benefits are provided under that account.
(3) The consumer signs or initials an affirmative written request for the insurance after receiving the required disclosures. See, 12 C.F.R. § 1026.4(d)(1).
These conditions generally aim at ensuring the consumer voluntarily purchased the coverage before allowing the charge to be excluded from the finance charge.
Similar to insurance premiums, Regulation Z excludes debt cancellation or debt suspension fees so long as specified conditions are met. See, 12 C.F.R. § 1026.4(d)(3). These conditions are similar to the above conditions for insurance premiums with one additional disclosure related to notifying the consumer that interest will continue to accrue during the suspension period even though the obligation to pay is suspended.
Under the MLA, premiums for credit life, accident, health, or loss-of-income insurance and debt cancellation or debt suspension fees are included in the MAPR regardless of the voluntary nature of the purchase by the covered borrower. See, 32 C.F.R. § 232.4(c)(1)(i).The DoD changed this aspect of the regulation under the reasoning that credit insurance and debt suspension products provide coverage for conditions that a covered borrower, as a member of the armed services, is already “substantially insured for, or otherwise substantially provided benefits for, by the military service.” In other words, these products are included in the MAPR because the DoD views them as duplicative, providing no substantial utility to covered borrowers.
It is safe to say that the DoD’s intention was to cast as wide a net as possible when capturing fees to be included in the MAPR and a charge that is included in the definition of a finance charge under Regulation Z would likely also be included in MAPR calculations. However, it is important to emphasize that a charge excluded from the definition of finance charge under Regulation Z is not necessarily excluded from the MAPR.
For more information about the MLA final rule, check out the September issue of NAFCU’s Compliance Monitor.
The following chart is intended to be a helpful quick reference guide to assist you in identifying how charges are treated under each regulation. This is not intended to be a comprehensive list.
Programming Note. NAFCU's office will close at noon today and will also be closed on Monday for the long holiday weekend. We will be back to blogging on Wednesday. Have a great Labor Day weekend!
NAFCU Webcast. Join us on Wednesday, September 16 from 2PM until 3:30 PM EST for Credit Union Mergers: Pros, Cons, Do's and Dont's. A merger can be considered an opportunity or challenge for your credit union. As a top executive and decision maker, it’s important to understand the best practices for a successful merger. Whether you’re the merging or surviving credit union, you have to consider important aspects that may make or break your final decision to merge. Learn the pros and cons and prepare yourself and your team with this webcast.
On Tuesday, the Department of Defense (DOD) finalized comprehensive changes to its rules that implement the Military Lending Act (MLA). Changes to these rules affect credit unions who offer certain credit products to active servicemembers or their dependents. The new rules become effective on October 1, 2015, but compliance is not required until October 3, 2016. Changes that affect credit cards, however, are delayed until October 3, 2017, with the possibility that the delay can be extended to October 3, 2018.
The final rule contains many complexities and nuances. This blog post provides a high-level summary of the main provisions affecting credit unions. NAFCU’s Regulatory Affairs team will issue a detailed summary of the final rule shortly, which will be available to NAFCU members on our website (member login required). NAFCU issued a Regulatory Alert on the proposed rule last year, which is currently available on our website (14-EA-25). The final rule issued by the DOD was published in the federal register on Wednesday and can be found at 80 FR 43559.
The final rule expands MLA protections to a broader range of closed-end and open-end credit. Under the final rule, the phrase “consumer credit” is expanded to include credit extended to a “covered borrower” for personal, family, or household purposes, and is subject to a finance charge or payable by a written agreement in more than four installments. For instance, payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards are covered under the new rule. Certain types of loans, however, are specifically excluded from the definition of “consumer credit.” For example, residential mortgages, motor vehicle loans secured by the vehicle being purchased, and any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased are specifically excluded.
The phrase “covered borrower” includes any member of the armed forces, or their dependents (as defined in 10 U.S.C. § 1072(2)), who is on active duty, or active guard and reserve duty. The final rule allows credit unions to use the existing method for conducting a “covered-borrower check,” which involves the use of a “covered borrower” identification statement, as a safe harbor for compliance until October 3, 2016. After October 3, 2016, credit unions can determine if a borrower is a “covered borrower” by using one of the safe harbor methods listed in the final rule. The safe harbor methods include 1) checking the member’s duty status on the DOD database (available at https://www.dmdc.osd.mil/mla/welcome.xhtml), or 2) using a consumer report obtained from a nationwide consumer reporting agency (at this time, it is not clear how a nationwide consumer reporting agency will identify covered borrowers or their dependents).
The MLA, under the existing and final rules, prohibits a credit union from imposing a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower. Under the final rule, MAPR covers all interest and fees associated with a loan, including most ancillary “add-on” products and application fees, unless excluded from the rule.
One notable exclusion is an application fee charged by a federal credit union when making a qualifying short-term, small amount closed-end loan (e.g., Payday Alternative Loans or PALs). This exemption, which was a NAFCU-sought modification to the proposed rule, specifically excludes from the MAPR calculation an application fee charged to a covered borrower when making a short-term, small amount loan, also known as a PAL loan. The application fee, however, may only be excluded once in a 12-month period. An application fee charged to a covered borrower who applies for a second short-term, small amount loan within the 12-month period of the first loan may not be excluded from the MAPR calculation. See 80 FR 43570. A second noteworthy exclusion is for a credit card fee that is both “bona fide” and “reasonable” for that type of fee. See 80 FR 43573. The final rule sets out specific standards for determining what type of fees are “bona fide” and “reasonable” for that type of fee.

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