On December 14, 2017, the Department of Defense published in the Federal Register an amendment to its interpretive rule of the Military Lending Act (MLA). If you haven’t taken the time to get up to speed on the MLA, now is the time to do so and make a point to connect with your legal counsel to ensure you understand what this means for your dealership and military customers.
The MLA was put in place by the Department of Defense (DOD) in 2006 to protect our active duty military personnel and their families from predatory lending practices. In 2015 the DOD issued a Final Rule revising the execution of the MLA rules to cover a wider range of credit products that impact traditional creditors such as banks, credit unions and some nonbank financial institutions.
The expanded scope includes a broader range of closed-end and open-end credit products, excluding all real estate secured transactions and certain auto and personal property transactions that don’t include funds in excess of the purchase price.
As part of this amendment, the DOD provided questions and answers that are related to whether credit extended for auto purchases is exempt.
2. Does credit that a creditor extends for the purpose of purchasing a motor vehicle or personal property, which secures the credit, fall within the exception to ‘‘consumer credit’’ under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property?
Answer: The answer will depend on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance. Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.
Examples that may fall within the consumer credit exception include:
- Purchase price of vehicle including options like leather seats and extended warranty
- Purchase price of vehicle including negative trade equity
Loans that include financing a credit related product or service and not a product or service expressly related to the vehicle, or cash out/ cash advance transactions, are exempt under the MLA. Examples that do not fall within the execution of consumer credit may include:
- Guaranteed Auto Protection (GAP) Insurance
- Credit Life and Disability Insurance
- Hybrid purchase money with cash advance, transaction not expressly intended to finance vehicle.
Since the burden of proof is on the lender to verify a borrower’s status, it is in your best interest to implement a few simple processes that will ensure you are meeting the guidelines to protect your customer. Reach out to your credit reporting vendor or credit bureaus to include a MLA inquiry as part of your credit application, prescreen or account review process. This information can then follow the customer through the F&I process thus allowing the proper lending requirements to be met.
With NCC credit solutions, Equifax offers one available option. With the MLA Covered Borrower Status solution from Equifax, you can obtain this information at the time of your credit pull or as a standalone inquiry when the consumer applies for financing with just name, address, date of birth and Social Security number. You will receive a ‘Yes’ or ‘No’ indicator on the report confirming the status supplied by the Department of Defense database, or an ‘I’ for insufficient information.
Information contained in this document does not constitute legal advice from National Credit Center LLC or Equifax. Dealers should consult their legal counsel for interpretation of the rules, determination of impact to their business, and suitability of individual compliance solutions.