The Department of Defense published CUNA-requested guidance pertaining to the Military Lending Act last week. This new interpretive rule amends the guidance in three of the 19 questions and answers presented by DOD in August, and it clarifies a fourth issue not addressed in the August guidance.
Purchase-money vehicle loans
The new guidance clarifies that whether a purchase-money loan loses its exemption from the MLA depends on what is financed.
Generally, financing costs that are related to the collateral’s purchase will not eliminate the loan’s exemption from the MLA rule, but a loan that finances a credit-related product or service is not eligible for the exemption.
For example, a loan that includes financing for Guaranteed Auto Protection (GAP) Insurance does not qualify for the exemption.
The new guidance restates the concept from the initial Interpretive Rule that: a loan that provides purchase-money secured financing of a vehicle or personal property along with additional “cash-out” financing that is unrelated to the purchase, does not qualify for the exemption and must comply with the MLA rule’s requirements.
Security interests in covered borrower’s deposit accounts
The new guidance also states the MLA rule prohibits a creditor from using the borrower’s account information to create a remotely created check or payment order to collect payments.
However, the rule permits a covered borrower to convey security interests to creditors in their checking, savings, or other deposit accounts provided that they are not prohibited by other applicable law and the creditor complies with all other provisions of the MLA rule.
The new guidance also states that the MLA rule permits a creditor to exercise a statutory right to take a security interest in a covered borrower’s deposit accounts at any time, including enforcing statutory liens, provided that it is not prohibited by other applicable law and the creditor complies with all other provisions of the MLA rule.
Determining covered-borrower status
The new guidance clarifies that a creditor qualifies for the safe harbor under the MLA Rule when the covered borrower check is conducted at the time a consumer initiates a credit transaction or applies to establish an account, or up to 30 days prior to the action taken by the consumer.