Last week I discussed the Military Lending Act's ("MLA") credit card provisions. This week I will discuss a few of the more common questions we receive regarding the MLA.
Probably the most common question we get is whether the MLA covers a particular type of loan. I think the problem is that when the scope of the MLA was expanded, most people (including me) talked about the new loan types that will be covered. Instead of thinking of the loan types that are covered, it is much easier to think of the loan types that are excluded. The MLA applies to all extensions of consumer credit (both open- and closed-end) to a covered borrower except:
- Extensions of credit secured by an interest in a dwelling;
- Loans expressly intended to purchase a vehicle or other personal property that are secured by the vehicle/personal property being purchased;
- Loans that are exempt from Regulation Z (except for certain state exempt loans); or
- Until October 3, 2017, credit card accounts under an open-end (not home secured) consumer credit plan.
If it's a consumer purpose loan to a covered member or a dependent of a covered member and it does not fit into one of the categories above, it will be subject to the MLA. For the dwelling secured loans, this includes purchases, construction loans, refinances, HELOCs, and reverse mortgages. It really doesn't matter the purpose of the loan, it is exempt if it is dwelling secured. The dwelling does not have to be attached to real property. Also, it is dwelling secured. This means that loans secured by non-dwelling real estate, including lot, non-residential real estate loans, raw land, etc., are all covered (if they meet all the other requirements). For purchase money loans, the purpose of the loan must be to finance the purchase of the vehicle or personal property and any related costs but nothing else. So, a purchase money loan with cash out would not be exempt. Second, the loan must be secured by the vehicle/personal property being purchased. If I go get a loan from Silly Example Bank to purchase that super sweet '75 Gremlin I have my eye on, but I secure it with my almost as cool '80 Pinto and not the Gremlin, the loan will not be exempt. The purchase money exemptions only apply to motor vehicles and personal property. A loan to purchase real property secured by the real property being purchased will be a covered loan (assuming it meets the other requirements and the real property is not a dwelling).
Also, the MLA applies only to extensions of credit. The MLA will not apply to existing loans and it will not apply to modifications unless the modification meets the requirements of a refinance and are treated as a new transaction under § 1026.20(a) under Reg. Z.
Another common question we get is, "the applicant told us that she is/is not in the military, do we need to do a covered borrower check?" A covered borrower check is never required, even if an applicant tells you they're on active duty. A covered borrower check using either the MLA database or a consumer report from a nationwide CRA, however, provides you with a safe harbor that protects you even if the consumer is in fact a covered borrower. If you do not conduct a covered borrower check and a consumer falsely tells you that they are not a covered borrower when they are, in fact, a covered borrower, you will violate the MLA if you do not provide the MLA disclosures and/or you exceed the MAPR or other limitations. But, if you perform a covered borrower check using the MLA database or a consumer report from a nationwide CRA, and it tells you that the applicant is not a covered borrower, you are protected even if the borrower really is a covered borrower.
While on this topic, let's discuss the Covered Borrower Identification Statement. The Covered Borrower Identification Statement provided a safe harbor under the old rule. The new rule permitted creditors who extended credit that was covered under the old rule to continue to use it for a safe harbor for such credit until the mandatory compliance date of October 3, 2016. After that date, a Covered Borrower Identification statement no longer provides any safe harbor. The whole purpose of the safe harbor change was to avoid making covered members and their dependents self-identify. You may continue to use it; nothing in the rule prohibits it. But it provides you with absolutely no protection and if you are still using it, I recommend that you immediately stop.
Another closely related question we get is whether the MLA continues to apply when the borrower is no longer a covered borrower. A borrower ceases to be a covered borrower when they are no longer a covered member or dependent of a covered member. And a loan ceases to be a covered loan when the borrower is no longer a covered borrower. This often leads to a question regarding, how do you know when a borrower is no longer a covered borrower? Well, the simplest way is the borrower tells you. But that will rarely happen, so the most likely way you will find out is by checking the database.
I can hear you now. "Wait just a second, Mr. Smarty Pants! What about the prohibition on historic lookbacks?" Well, checking to see if the borrower is still a covered borrower is not a historic lookback. What the prohibition on historic lookbacks means is that you cannot look back at the MLA database or obtain any information directly or indirectly (e.g. from a consumer report that uses information from the database to provide the covered borrower status) to determine if a consumer was a covered borrower at the time the loan was consummated or the account opened. If you forgot to do a covered borrower check but caught it in a post-closing review, you cannot check the MLA database to determine if the borrower was a covered borrower as of the date the loan closed. Or, if you purchased a loan and there was no MLA certificate in the file, you may not access the database to see if the borrower was a covered borrower as of the date the loan closed. The MLA, however, does not prohibit you from accessing the MLA database for other purposes, such as determining whether a previously covered borrower is still a covered borrower.
Speaking of the MLA database, this database is completely different than the SCRA database. The SCRA database tells you whether a borrower is, or was as of a specified date, a servicemember; it does not tell you about dependents. The MLA database will tell you whether a person is a covered borrower that is it includes covered members as well as dependents of covered members. If a nationwide CRA is reporting covered borrower status they should include both covered borrowers and dependents. If you are using the database, you need to be sure it is the MLA database. If you use a consumer report to check for covered borrowers, check with the CRA you use to verify that they include dependents.
We don't get this question a lot but I hear it enough and it is very important, so I feel it needs to be addressed. We occasionally will hear something like, "we are nowhere near a military base; do I even need to worry about all this MLA stuff?" Well, yeah, you do. I need to warn you that just because there are no bases around, it doesn't mean that you won't have any covered borrowers. There are active duty servicemembers stationed all over the place and often dependents do not live with servicemembers who are in training or are deployed. A covered borrower can be, literally, right next door or anywhere.
I know this is only scratching the surface, but I hope it addressed some of the questions you have about the MLA.