Compliance Blog

Written by Brandy Bruyere, Director of Regulatory Compliance

Last week, NCUA issued a regulatory alert 16-RA-04 addressing last year's changes to the Military Lending Act, many of which have a compliance deadline of October 3, 2016. We've been blogging on the challenges involved with this implementation process and this regulatory alert contains a summary of the rule's basic requirements which can be found here. It is a helpful starting point for those who are learning the MLA rules, covering the rule's scope, limitations on credit and the disclosure requirements.

Speaking of identifying covered borrowers, if your credit union expressed interest in the Defense Manpower Data Center's (DMDC) direct connect option for accessing the MLA covered borrower database, the DMDC is reviewing questionnaires. However, NAFCU has been advised that very few financial institutions will be selected for this option largely due to limited resources that prevent DMDC from offering a large number of connections to its database. Meanwhile, some credit unions report that the MLA database does not work for them, and this seems to be related to an expired security certificate or similar issue that causes many networks firewalls and other security measures to block the website. NAFCU has brought this issue to DMDC's attention and is working towards a solution.

Another MLA FAQ. Many members have asked us what happens when someone who was a covered borrower when he or she opened a covered loan. Then, the member leaves the military, or is no longer a servicemember's dependent, and therefore ceases to be a covered borrower. Does the MLA continue to apply to the loan?

The rule generally applies based on whether the member was a covered borrower at the time they become obligated on the loan, although the definition does exclude those who are no longer covered borrowers. Here is an excerpt from the rule itself in section 232.3, note that the rule describes a covered borrower in terms of the time of application but states that a person can cease to be a covered borrower:

(g)

(1) Covered borrower means a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit, is a covered member (as defined in paragraph (g)(2) of this section) or a dependent (as defined in paragraph (g)(3) of this section) of a covered member.

(4) Notwithstanding paragraph (g)(1) of this section, covered borrower does not mean a consumer who (though a covered borrower at the time he or she became obligated on a consumer credit transaction or established an account for consumer credit) no longer is a covered member (as defined in paragraph (g)(2) of this section) or a dependent (as defined in paragraph (g)(2) of this section) of a covered member.

Section 232.1(a) contains some examples that help clarify what happens when a previously covered borrower does cease to be a covered borrower:

232.2 Applicability; examples.

(a)

(1) Applicability. This part applies to consumer credit extended by a creditor to a covered borrower, as those terms are defined in this part Nothing in this part applies to a credit transaction or account relating to a consumer (which otherwise would be consumer credit) when the consumer no longer is a covered borrower.

(2) Examples

(i) Covered borrower. Consumer A is a member of the armed forces but not serving on active duty, and holds an account for closed-end credit with a financial institution. After establishing the closed-end credit account, Consumer A is ordered to serve on active duty, thereby becoming a covered borrower, and soon thereafter separately establishes an open-end line of credit for personal purposes (which is not subject to any exception or temporary exemption) with the financial institution. This part applies to the open-end line of credit, but not to the closed-end credit account.

(ii) Not a covered borrower. Same facts as described [above]. One year after establishing the open-end line of credit, Consumer A ceases to serve on active duty. This part never did apply to the closed-end credit account, and because Consumer A no longer is a covered borrower, this part no longer applies to the open-end line of credit.

This indicates that if the member is no longer a covered borrower, then the rules would not continue to apply to that product. Here's an excerpt from the preamble that gives a bit more detail:

(g) Covered borrower. In general, the Department has adopted the definition of covered borrower as proposed. ..

For the reasons discussed in connection with the modification to 232.2(a), the Department has modified the definition of covered borrower, by adding a new subparagraph (4), to clarify that a consumer who had been a covered borrower ceases to hold that status when the consumer no longer is a covered member or a dependent of a covered member.

(emphasis added)

This seems contradictory to another section of the preamble (which we highlighted in a previous blog). There is language on calculating the MAPR which seems to indicate that credit ancillary products that are purchased at any time in connection with the loan would be included based on the member's status at the time the loan was established:

Nothing in the MLA necessarily limits the inclusion in the MAPR of these charges only to those that are sold at the outset of the credit transaction. Particularly insofar as consumer credit now encompasses open-end credit products, the Department has concluded that the MLA should be interpreted to require a creditor to include in the MAPR the fee for any ancillary product sold with any extension of credit to a [covered borrower] so long as that ancillary product is associated with the extension of credit which could arise at any time in an ongoing, open-end account for consumer credit. Accordingly, the Department has determined to amend [the rule] so as to require the inclusion in the MAPR of any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or (at any time in connection with) an account for open-end credit, so long as the consumer was a covered borrower at the time the account was established.

(emphasis added)

While the rule text is controlling as compared to the preamble, it is this kind of drafting that can make implementing the MLA challenging as credit unions work to ensure compliance with the rule.

Palate Cleanser. That was a lot for a Monday morning, so here's a picture of Lemmy and Nolan. At 17 months, Nolan is pretty mobile these days. Sometimes he pushes his playpen around and poor Lemmy gets stuck. He's a very patient dog brother though.