Compliance Blog

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Good morning to all of you out there in regulatory compliance land. As credit unions prepare for the October 3, 2016 effective date of the U.S. Department of Defense's Military Lending Act Rule (MLA Rule) for all consumer credit products other than credit cards, NAFCU continues to receive questions regarding whether particular products or services must be included in the military annual percentage rate (MAPR). One product that may be included in the MAPR that may shock credit unions is comprehensive and collision insurance (as opposed to auto insurance which may be required by state law), which is often required as part of a vehicle loan to protect the credit union from risks associated with destruction of the underlying collateral.

Under the MLA Rule, credit unions are required to include premiums or fees related to credit insurance products, debt cancellation contracts, debt suspension agreements, and credit-related ancillary products when calculating the MAPR. 32 C.F.R. 232.4(c)(1)(i)-(ii). Credit unions must also include finance charges associated with the consumer credit except for bona fide fees charged in connection with a consumer credit card account. 32 C.F.R. 232.4(c)(iii)(A), (d). When determining what products are included in the rule, it is important to know that the term finance charge has the same meaning under the MLA Rule as used in Regulation Z with one important exception: these charges are included in the MAPR even though they may be excluded from the finance charge under Regulation Z. 32 C.F.R. 232.3(n); 232.4(c)(1)(iv).

Regulation Z treats premiums or other charges for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, written in connection with a credit transaction as finance charges unless an exception applies. 12 C.F.R. 1026.4(b)(8). This means that premiums or fees for comprehensive and collision insurance required by the credit union as a condition of the extension of credit would likely be considered finance charges. One thing to note at the outset, however, is that not all premiums or other charges for property insurance are considered finance charges, only charges for insurance written in connection with the credit transaction.

The Official Interpretations to Regulation Z provide some clarification that pre-existing insurance policies and force-placed insurance written as a result of a member default are not considered to be written in connection with the transaction:

1. Pre-existing insurance policy. The insurance discussed in 1026.4(b)(7) and (b)(8) does not include an insurance policy (such as a life or an automobile collision insurance policy) that is already owned by the consumer, even if the policy is assigned to or otherwise made payable to the creditor to satisfy an insurance requirement. Such a policy is not written in connection with the transaction, as long as the insurance was not purchased for use in that credit extension, since it was previously owned by the consumer.

2. Insurance written in connection with a transaction. Credit insurance sold before or after an open-end (not home-secured) plan is opened is considered written in connection with a credit transaction. Insurance sold after consummation in closed-end credit transactions or after the opening of a home-equity plan subject to the requirements of 1026.40 is not considered written in connection with the credit transaction if the insurance is written because of the consumer's default (for example, by failing to obtain or maintain required property insurance) or because the consumer requests insurance after consummation or the opening of a home-equity plan subject to the requirements of 1026.40 (although credit-sale disclosures may be required for the insurance sold after consummation if it is financed).

12 C.F.R. pt. 1026, Supp. I, comment 4(b)(7) and (b)(8). This commentary may provide some cover for credit unions extending credit to covered borrowers who may have pre-existing insurance policies or when force placing comprehensive and collision coverage in the event that a covered borrower fails to maintain adequate coverage required by the loan agreement.

For those of you wondering how comprehensive and collision insurance could possibly be considered a finance charge under Regulation Z, the rule generally excludes most insurance products where the member is permitted to shop for coverage:

(2) Property insurance premiums. Premiums for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, including single interest insurance if the insurer waives all right of subrogation against the consumer, may be excluded from the finance charge if the following conditions are met:

(i) The insurance coverage may be obtained from a person of the consumer's choice, and this fact is disclosed. (A creditor may reserve the right to refuse to accept, for reasonable cause, an insurer offered by the consumer.)

(ii) If the coverage is obtained from or through the creditor, the premium for the initial term of insurance coverage shall be disclosed. If the term of insurance is less than the term of the transaction, the term of insurance shall also be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under 1026.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage.

12 C.F.R. 1026.4(d)(2). Unfortunately, since the MLA Rule sweeps finance charges back into the MAPR even though they may be excluded under Regulation Z, this means that these insurance premiums, which have traditionally been excluded from the APR, may now be required to be included in the MAPR.

Even though it appears that premiums or fees for comprehensive and collision insurance may be covered as finance charges, one thing that may provide some comfort is that the rule does not appear to give any indication that general auto insurance policies, which are typically required by state law, are included as credit insurance or credit-related ancillary products. Regulation Z does not even consider auto insurance as a finance charge since the creditor is not the beneficiary of the policy. See, 12 C.F.R. pt. 1026, Supp. I, comment 4(d)-6. These products appear to be fundamentally different from comprehensive and collision coverage since they insure the motorist from liability rather than insuring the value of the collateral.

Hopefully this blog has been helpful. Have a good day and a good rest of your week!

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NAFCU Releases Revised MLA Compliance Guide. Since releasing our MLA Compliance Guide last month, we've had a lot of great questions from our members. This updated guide includes more information on delivering oral disclosures; calculating MAPR for open-end credit; the applicability of the MLA to land, boats, and RVs; and credit-related ancillary products, force placed insurance and skip-a-pay programs. NAFCU members can access the Compliance Guide here.

Federal Reserve Issues Consumer Compliance Outlook. The Federal Reserve issued the first issue of 2016 of the Consumer Compliance Outlook, a publication dedicated to consumer compliance issues. Topics covered include interagency flood insurance questions and answers, credit and debit card disputes, updates from Washington, and a summary of recent court cases involving federal consumer laws. The publication is available here in electronic format. Credit unions can also sign up to receive a hard copy of the Consumer Compliance Outlook through the same website.

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DoD Military Lending Act Interpretive Guidance Released

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.