WASHINGTON (12/14/15)--Expansion of the Military Lending Act (MLA) to cover a number of open- and closed-end loans may pose serious problems to credit unions that serve a large number of military members, according to CUNA’s compliance staff.
The Department of Defense (DOD) finalized its changes to the MLA in July, and they became effective Oct. 1, with a mandatory compliance date of Oct. 3, 2016.
Section 232.8(e)(3) of MLA regulations permits a creditor to take a security interest in funds deposited after the extension of credit and in an account established in connection with the loan.
This same provision has been in the regulations since 2007, but because of the limited types of loans that were subject to the MLA (payday loans, auto title loans and tax refund anticipation loans), the provision wasn’t particularly worrisome.
However, the expansion of MLA coverage now includes most open-end as well as closed-end loans subject to Regulation Z. For loans that are covered by the MLA regulations, the specific provisions regarding security interests could severely limit the amount of funds on deposit that are subject to set-off, which could result in higher loan losses on loans covered by the MLA regulations.
Standard cross-collateralization clauses, contained in many loan documents, typically permit a security interest to be obtained in shares deposited both prior to and after consummation of the loan and in connection with any share account of the borrower.
Statutory lien provisions in the National Credit Union Administration’s regulations permit federal credit unions to apply the balance of shares and dividends in all individual and joint accounts to the loan balance once a member is in default.
Standard cross-collateralization clauses, as well as NCUA’s statutory lien provisions, do not comply with the MLA regulations limiting the security interest to shares deposited after the loan is established and to funds that are deposited into an account set up in connection with the loan.
Because Section 232.9(c) of the MLA regulations provides that any credit agreement, promissory note or other contract with a covered borrower that fails to comply with the regulations is void from the inception, any loan agreement between a credit union and covered borrower that contains only the standard cross-collateralization language and language regarding statutory liens could be considered void and the borrower would not be required to repay any outstanding loan balance.