The NAFCU Journal May - June 2018 - 52

COMPLIANCE CENTRAL

The MLA Blindsides Again: The
Rule's Effect on Vehicle Lending
By Stephanie Lyon

C

redit unions were hopeful that
they were finally driving past
the Military Lending Act's
(MLA) multiple speed bumps.
However, the Department of Defense
(DoD) issued its second interpretative
rule in December 2017, placing further
roadblocks and setting off more alarms
in the popular area of vehicle lending.

Many credit unions use indirect lending
partnerships to ensure their loans reach
as many potential members as possible.
These relationships are popular - a
study shows that credit unions participating in indirect lending have vehicle
loan portfolios comprising between 33
and 40 percent of indirect loans. Generally, these partnerships work in the
following way: The credit union has an
agreement with dealers whereby the
credit union is the lender, and the dealer
simply assists in closing the loan transaction. This type of arrangement can be
best understood as a vendor relationship
in which the credit union is ultimately
responsible for compliance. Rules and
regulations such as the MLA can have a
severe impact on a credit union's indirect
lending relationship, as credit unions
will ultimately own the loan along with
any nasty compliance surprises.

How We Arrived Here

The MLA has been in effect since October 2016 and generally requires credit
unions to give covered borrowers certain
disclosures and limit consumer credit to
the 36 percent military annual percent
rate (MAPR). The MLA is meant to cover
consumer credit, but it excludes loans
that are expressly intended to finance the
52

purchase of a motor vehicle, in which the
credit is secured by the vehicle being purchased (among other loan types). At first
glance, this seems like a straightforward
exception that helps keep out indirect
lending relationships.
Nonetheless, the DoD issued its first interpretative rule in August 2016, attempting
to clarify the scope of the exemption for
loans that are "expressly intended" to
finance the purchase of personal property.
To summarize the guidance, the DoD
determined that any credit transaction
that provides purchase-money-secured
financing of personal property along with
additional "cash-out" financing is not
eligible for the exception. Because the
exceptions for the purchase of personal
property and motor vehicles had nearly
the same wording, this left many credit
unions wondering whether motor vehicle
purchase loans that exceed the purchase
price of the vehicle could be MLA-covered loans. Examples of these kinds of
situations could include the financing of
negative equity, title, insurance or other
add-ons. After multiple requests from
the industry, the DoD decided to issue its
second set of interpretative rules to clarify
how the first interpretative rule affects
vehicle loans.
The second set of interpretative rules
tackled negative equity scenarios when a
member owes more on their loans than
the value of the vehicle. It also covered
cash-out transactions and the financing
of add-on products. The guidance made
it clear that vehicle loans financing more
than the value of the car were not subject
to the MLA if the financing was to cover

negative equity scenarios. On the other
hand, transactions in which the member
receives additional cash from the loan (i.e.,
cash-out transactions) are subject to the
MLA rule requiring specific disclosures as
well as a 36 percent MAPR limit (among
other requirements). For the most part,
this was the anticipated interpretation of
the rule for these types of loans. Where
the second interpretative rule caused
uproar was in the DoD's interpretation of
financing of add-on products.
According to the new guidance, "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." (See 82 Fed. Reg. 58740.) This
means that the financing of costs related
to the vehicle, such as leather seats, does
not disqualify the loan from the exception, but financing credit-related products or services, such as guaranteed auto
protection (GAP) insurance or a credit
insurance premium, does.

Current Compliance Potholes

The issue with the second interpretive
rule is that the DoD has taken the questionable stance that the guidance simply
explains what the rule already states
and has not changed the requirements
of the MLA rule since its effective date
of October 2016. This means that loans
made after the MLA's effective date
and before the second interpretative
guidance was issued are all looked at
as if the interpretative guidance was
in effect the entire time. While this
stance creates procedural concerns, the
THE NAFCU JOURNAL  MAY-JUNE 2018



Table of Contents for the Digital Edition of The NAFCU Journal May - June 2018

Conferences
From the Chair
Washington and Industry Briefs
Trump, Credit Union CEOs Discuss Issues at White House
Growth Strategies
In Cybersecurity We Trust?
The New Landscape of Mobile Banking
2018 Annual Conference Exhibitor Directory
Executive Spotlight
Management Insight
Compliance Central
Inside NAFCU Services
The NAFCU Journal May - June 2018 - Cover1
The NAFCU Journal May - June 2018 - Cover2
The NAFCU Journal May - June 2018 - 1
The NAFCU Journal May - June 2018 - 2
The NAFCU Journal May - June 2018 - Conferences
The NAFCU Journal May - June 2018 - From the Chair
The NAFCU Journal May - June 2018 - 5
The NAFCU Journal May - June 2018 - Washington and Industry Briefs
The NAFCU Journal May - June 2018 - 7
The NAFCU Journal May - June 2018 - 8
The NAFCU Journal May - June 2018 - 9
The NAFCU Journal May - June 2018 - Trump, Credit Union CEOs Discuss Issues at White House
The NAFCU Journal May - June 2018 - 11
The NAFCU Journal May - June 2018 - 12
The NAFCU Journal May - June 2018 - 13
The NAFCU Journal May - June 2018 - 14
The NAFCU Journal May - June 2018 - 15
The NAFCU Journal May - June 2018 - Growth Strategies
The NAFCU Journal May - June 2018 - 17
The NAFCU Journal May - June 2018 - In Cybersecurity We Trust?
The NAFCU Journal May - June 2018 - 19
The NAFCU Journal May - June 2018 - 20
The NAFCU Journal May - June 2018 - 21
The NAFCU Journal May - June 2018 - 22
The NAFCU Journal May - June 2018 - 23
The NAFCU Journal May - June 2018 - The New Landscape of Mobile Banking
The NAFCU Journal May - June 2018 - 25
The NAFCU Journal May - June 2018 - 26
The NAFCU Journal May - June 2018 - 27
The NAFCU Journal May - June 2018 - 28
The NAFCU Journal May - June 2018 - 29
The NAFCU Journal May - June 2018 - 30
The NAFCU Journal May - June 2018 - 2018 Annual Conference Exhibitor Directory
The NAFCU Journal May - June 2018 - 32
The NAFCU Journal May - June 2018 - 33
The NAFCU Journal May - June 2018 - 34
The NAFCU Journal May - June 2018 - 35
The NAFCU Journal May - June 2018 - 36
The NAFCU Journal May - June 2018 - 37
The NAFCU Journal May - June 2018 - 38
The NAFCU Journal May - June 2018 - 39
The NAFCU Journal May - June 2018 - 40
The NAFCU Journal May - June 2018 - 41
The NAFCU Journal May - June 2018 - 42
The NAFCU Journal May - June 2018 - 43
The NAFCU Journal May - June 2018 - 44
The NAFCU Journal May - June 2018 - 45
The NAFCU Journal May - June 2018 - 46
The NAFCU Journal May - June 2018 - 47
The NAFCU Journal May - June 2018 - Executive Spotlight
The NAFCU Journal May - June 2018 - 49
The NAFCU Journal May - June 2018 - Management Insight
The NAFCU Journal May - June 2018 - 51
The NAFCU Journal May - June 2018 - Compliance Central
The NAFCU Journal May - June 2018 - 53
The NAFCU Journal May - June 2018 - Inside NAFCU Services
The NAFCU Journal May - June 2018 - 55
The NAFCU Journal May - June 2018 - 56
The NAFCU Journal May - June 2018 - Cover3
The NAFCU Journal May - June 2018 - Cover4
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