The DoD has issued three interpretive rules in connection with the MLA rule to clarify and provide additional guidance in certain areas. The interpretive rules were issued Aug. 26, 2016; Dec. 14, 2017; and Feb. 28, 2020.
Question No. 2 from the August 2016 interpretive rule has had a significant impact on MLA lending.
It states that credit extended to a covered borrower for the express purpose of purchasing personal property which secures the credit is not entitled to the MLA exemption where the creditor simultaneously extends credit in an amount greater than the purchase price of the personal property and the additional financing is not related to the collateral.
Losing the MLA exemption means the creditor must comply with MLA requirements.
Question No. 2 failed to mention purchase-money vehicle loans, specific items that could be financed without losing the exemption because they are related to the collateral (personal property), or the specific items that would not be related to the collateral and could not be financed without causing a loss of exemption.
CUNA asked the DoD to provide additional clarification of the meaning of Question No. 2. The DoD responded by issuing the December 2017 interpretive rule.
This rule states that any loan that finances a purchase-money vehicle or personal property loan that is secured by the vehicle or personal property, and also finances other costs or items expressly related to the collateral (i.e., optional leather seats, extended warranty, or a GPS unit), will continue to be exempt from the MLA rule.
That is true because those items are directly related to the vehicle that is the security for the loan.
Further, if a covered borrower trades in a vehicle with negative equity as part of the purchase of another vehicle, and the loan to purchase the new vehicle includes financing to repay the credit on the trade-in vehicle, the entire loan transaction is eligible for the MLA exemption.
That’s because the trade-in of the first vehicle is expressly related to the purchase of the second or new vehicle.
On the other hand, a loan that finances a credit-related product or service such as guaranteed auto protection (GAP) insurance or credit life or credit disability insurance does not qualify for the MLA exception, and the creditor must comply with the MLA requirements.
This situation caused major problems with credit unions’ indirect lending programs.
An auto dealer that financed GAP or credit insurance would be required to comply with the MLA rule requirements. However, Section 232.8(f) prohibits certain creditors, including auto dealers, from taking a security interest in a vehicle’s title.
The MLA rule provides an exception for federal- or state-chartered credit unions, banks, and savings associations which are permitted to obtain a security interest in the title of a vehicle as security for the covered loan.
In early 2018, CUNA and other trade associations asked the DoD to eliminate question No. 2 from the December 2017 and the August 2016 interpretive rules.
In February 2020, the DoD eliminated question No. 2 from the December 2017 interpretive rule but retained this question in the August 2016 interpretive rule.
By withdrawing question No. 2 from the December 2017 interpretive rule, DoD stated it was reverting to the original language in question No. 2 of the August 2016 interpretive rule.
MICHAEL MCLAIN is senior federal compliance counsel for Credit Union National Association. Contact the CUNA compliance team atcucomply@cuna.coop.
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