Blair Rugh | Chief Compliance Advisor
Leah M. Hamilton | Chief Compliance Officer
Other than Title XIV and TRID, I don't think we have seen more questions on a compliance topic during our 5 years of Compliance Services as we have for the Military Lending Act. Last week, compliance with the Military Lending Act (MLA) became effective. Because of the outstanding issues and concerns, we thought we would offer up a bit of guidance on what you should be checking this month to ensure that your people and your systems have the process nailed down.
First, there is no reprieve for best efforts like there was with TRID. You have to get it right before the loan closes as there is an express prohibition for look-backs to determine if the borrower is a covered borrower or dependent thereof. So, if you were counting on going back and checking at the end of the day or week, be sure to mark yourself down for a violation, even if it turns out the borrower was not covered. The violation is due to the prohibition on look-backs.
Next, if it is a residential mortgage loan, be sure to check that no one ran a check "just in case". It may not be a violation, but it will likely violate your policy and or procedures. Thus, it could lead to a ding for not following your internal policy and procedures. Same goes if you ran it for the principals or guarantors on commercial or agricultural loans.
To close up the easy checks, well, maybe this one isn't so easy. If the loan is to purchase a vehicle or personal property and is secured by that vehicle or personal property, then MLA does not apply. Now, there is still some ongoing debate as to whether a loan secured by the vehicle and additional collateral is a covered loan. Arguably, as long as the loan does not include cash out, then, it maintains its exception status. However, the additional collateral could be considered beyond "secured by that vehicle" and thus MLA might apply. Another gray area is that additional loan amount to finance closing costs and/or debt insurance. One argument is that the closing costs and debt insurance is for the purchase of that vehicle; the other is that it is cash out to pay for the closing costs and insurance. Our recommendation, check with your regulator to identify its position, and document, document, document.
Next on your sanity checklist is calculating the Military Annual Percentage Rate (MAPR). Verifying is quite the challenge as there is no OCC MAPRWIN out there. However, if your APR and your MAPR are equal, ensure that all applicable MAPR fees are being included. Double check your parameters on your system and make sure that your IT department knows that if your loan platform pushes out a new release for anything, you want to know about it so that you can double check to make sure your parameters were not overwritten. There is no box in the Fed Box (TIL box) for the MAPR, so be sure that you are saving it somewhere in your system or files because your examiner will be looking for it when the time comes; make it easy for them to find it to avoid digging through the files.
Oral and written disclosures, the written disclosures should be retained, as for the oral disclosures, be sure your process is documented and followed. Listen in on loan officer interactions to ensure oral disclosures are indeed being provided; preserve a copy of the script to your toll-free number, if you elected the latter route.
Add overdraft credit workouts to your monitoring as well. If your institution offers workouts that are in more than four installments, Regulation Z and MLA will both apply. If you do not add any finance charges or interest to an overdraft workout, the MAPR would not be an issue, but you still have to go through the steps... disclosures, check covered borrower status, etc.
The new regulations prohibit a creditor from requiring a covered borrower to waive any right that the borrower may have under any state or federal law, including the Service Members Civil Relief Act. Also, now a covered credit agreement may not provide for required arbitration or any other onerous legal notice requirement in the event of a dispute. In addition, no covered credit agreement may require a prepayment penalty for prepayment of the obligation in part or in whole. Be sure that each of these prohibitions has a check box on your monitoring.
These are just some of the key considerations you should be monitoring this month to ensure your compliance with the Military Lending Act, and it's best to close any gaps now rather than later. The danger of the Military Lending Act is not only the normal compliance pitfalls, but further that any credit agreement in violation of the Act is null and void. Ouch.