I. INTRODUCTION
The Department of Defense (DoD) has published an interpretive rule to its Military Lending Act Rule (MLA Rule). The rule is issued in the form of a FAQ and affirmatively addresses a series of significant issues for which confusion existed following issuance of the MLA Rule.
The interpretive rule does not change the date by which creditors must comply with the MLA Rule. Thus, except for credit cards, creditors must comply by October 3, 2016. (Compliance with the rules for credit cards is delayed until October 3, 2017, unless extended for an additional year until October 3, 2018.) The DOD issued interpretive rules on August 26, 2016, December 14, 2017, and February 28, 2020.
II. CLARIFICATIONS MADE BY THE INTERPRETIVE RULE
The interpretive rule is comprised of 21 questions and answers (Q & As - https://www.govinfo.gov/content/pkg/FR-2020-02-28/pdf/2020-04041.pdf; https://www.govinfo.gov/content/pkg/FR-2017-12-14/pdf/2017-26974.pdf; https://www.gpo.gov/fdsys/pkg/FR-2016-08-26/pdf/2016-20486.pdf). Among the most significant compliance and operational issues addressed in the Q & As are the following:
A. Payments by check and electronic fund transfer are permitted. (Q & A #16)
Under the MLA Rule, Section 232.8(e) makes an extension of credit unlawful if, in connection with the extension of credit, the creditor “uses a check or other method of access to a deposit, savings, or other financial account” maintained by the covered borrower. Many observers interpreted this provision to bar creditors from accepting payment from covered borrowers by check and electronic fund transfer.
The interpretive rule clarifies that Section 232.8(e) is intended to prohibit creditors from creating remotely-created checks and/or using post-dated checks provided by the borrower when credit is extended. According to the interpretive rule, Section 232.8(e) does not prohibit creditors from accepting payment from covered borrowers by check or electronic fund transfer.
The answer to Question 16 clears this up:
“As a general proposition the prohibition of a creditor’s use of a check or other method of access in Section 232.8(e) does not in any way imply that a creditor cannot be paid. In no case does paragraph (e) prevent covered borrowers from tendering a check or authorizing access to a deposit, savings or other financial account to repay a creditor. Section 232.8(e) also does not prohibit a covered borrower from authorizing automatically recurring payments, provided that such recurring payments comply with other laws, such as the Electronic Fund Transfer Act and its implementing regulations, including 12 CFR 1005.10, as applicable.”
B. A general description of the borrower’s payment obligation is sufficient when providing oral disclosures. (Q & A #12)
Under the MLA Rules, Section 232.6(a)(3) requires a creditor to provide a covered borrower with a clear description of the payment obligation before or at the time the covered borrower becomes obligated on the transaction or establishes an account. Section 232.6(d) requires such disclosures to be made in writing and orally. Oral disclosures can be provided in person or via a toll-free telephone number. The MLA Rule does not make clear what, exactly, the disclosures must contain. The interpretive rule clarifies that creditors may provide a general description of how the payment obligation is calculated, as long as that description is clear and accurate. Thus, the payment obligation disclosure need not reflect the specific terms of a credit agreement or credit transaction.
C. Creditors need not generate special credit agreements for covered borrowers. A uniform agreement with a savings clause is permitted. (Q & A #15)
Under the MLA Rules, Section 232.8 prohibits a creditor from including certain proscribed terms and provisions (e.g., a mandatory arbitration provision) in the agreement governing an extension of credit with a covered borrower. The interpretive rule clarifies that creditors may use the same agreement for covered and non-covered borrowers, provided the agreement contains a savings clause, which limits application of the proscribed terms to non-covered borrowers.
D. Loans secured by a deposit account. (Q & A #17)
Q & A #17 answers the question of whether you can take a current deposit account as security in the affirmative. Covered borrowers “may convey security interests in checking, savings or other financial accounts by describing a permissible security interest granted by covered borrowers. Thus, for example, a covered borrower may grant a security interest in funds deposited in a checking, savings, or other financial account after the extension of credit in an account established in connection with the consumer credit transaction.” The interpretive rule indicates that creditors may make loans secured by a bank account to covered borrowers, regardless of when the security interest is taken and not just if taken “after” the loan is made.
E. Exercising statutory right of set-off. (Q & A #18)
Q & A #18 specifically states that the MLA Rule does not curtail the creditor’s rights of set-off under state law. The MLA Rule does not impede your statutory rights to “take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by applicable law.”
Additional issues addressed among the FAQs include:
F. MLA does not cover overdraft products except overdraft lines of credit. (Q & A #1)
The interpretive rule explains that consumer credit excludes overdraft products, however, overdraft lines of credit are covered.
G. Hybrid purchase money and cash advance loans are not exempt from the rule. (Q & A #2)
The interpretive rule explains that a loan to purchase personal property which secures the credit “where the creditor simultaneously extends credit in an amount greater than the purchase price” is not included in the exemption for purchase money loans. The answer makes clear that “hybrid purchase money and cash advance loans” are not included in this exemption to the MLA Rule. It is not clear how this affects, for example, car loans secured by the car that include other products such as car warranties or maintenance products or purchase money loans that finance delivery fees. The answer explains that hybrid loans are not exempt because they provide additional financing that is “unrelated the purchase.” Loans for warranties and delivery would appear to be “related to the purchase,” but it is not clear that they are “personal property.”
H. For open-end credit, creditors have the option to waive fees or periodic charges that exceed the 36 percent MAPR at the end of a billing cycle or earlier. (Q & A #3)
There may be instances when, for open-end credit, the MAPR may exceed 36 percent in a given month, depending on the balance and the fees and interest imposed in a given month. The interpretive rule explains that creditors may waive amounts exceeding 36 percent MAPR for covered borrowers, but impose them on those who are not covered.
I. Fees the law requires creditors to pay may be passed through to a borrower without being included in the MAPR calculation. (Q & A #4)
J. For open-end credit, banks may charge fees that are not included in the MAPR calculation in months when there is no balance. (Q & A #5)
The MLA Rule provides that creditors may not impose any fee during a billing cycle when there is no balance, except for a participation fee up to $100 for noncredit card products and a reasonable bona-fide participation fee for credit cards. The interpretive rule clarifies that in such situations, fees that are not included in the MAPR calculation may be charged even if the balance is zero. Thus, a late fee, which is not included in the MAPR, may be charged in these circumstances.
For open-end credit, in months where there is no balance, certain fees may be charged to the account. The Rule provides that the MAPR for open-end credit should be calculated based on the “effective” APR contained in Regulation Z. That provision of Regulation Z provides that in months where there is no balance and a minimum or fixed charge, or other charge unrelated to the periodic rate (except a transaction charge) is charged, no APR can be calculated. The interpretive rule confirms that this “no MAPR calculable” provision applies under the MLA Rule. Thus, for example, where the customer has a zero balance because there was an advance payment or other credit (e.g. from a returned purchase) and the account has incurred a fee described above, the MAPR cannot be calculated and the fees are permitted.
K. Minimum interest charges are excludable if they are bona fide. (Q & A #6)
L. Creditors may rely on commercially compiled sources for information when determining whether its fees are reasonable and excludable from the MAPR based on a comparison of fees of “substantially similar products” of certain other creditors. (Q & A #7)
The interpretive rule states, “The Final Rule intends to provide a firm, yet flexible, adaptable standard allowing credit card issuers to exclude bona fide and reasonable credit cards from the calculation of the MAPR.” In addition, card issuers may rely on commercially available databases or other industry sources, so long as they meet the conditions of the regulation, e.g., a comparison of fees charged by five or more creditors with $3 billion in outstanding loans any time during the three-year period preceding the time the average is computed.
M. Card issuers may consider “benefits” of credit card rewards programs in determining whether the amount of a fee is (a) less than or equal to the average fee of other similar products and (b) reasonable overall. (Q & A #8)
The interpretive rule references the MLA Rule’s provision “that whether a participation fee is reasonable may be determined in reference to whether a credit card offers additional services or other benefits.” The interpretive rule further states, “Under the Department’s flexibly applied conditional exclusion, creditors may use any reasonable approach in identifying whether a fee is substantially similar for purposes of comparison and reasonable overall. Thus, the Department’s policy, in this regard, permits a creditor to consider whether the benefits provided by a rewards program in determining whether a fee is reasonable overall.”
N. Assignees are permitted to rely on a covered borrower identification safe harbor if the assignee maintains the original creditor’s record of a covered borrower’s military status obtained from the DoD’s MLA database or from a credit bureau. (Q & A #9)
O. Creditors are not prohibited from periodically screening credit portfolios to detect changes to a covered borrower’s status. (Q & A #10)
Thus, a bank may periodically check customers’ status to determine whether the customer is entitled to the MLA Rule’s protections and discontinue them if they are no longer a covered borrower.
Creditors enjoy the safe harbor if they make a determination of military status any time between 30 days prior to application and the time the account is established. The interpretive rule states, “Creditors must determine a consumer’s covered borrower status at or before the time of the transaction or at the time an account is established…” This provides guidance on the MLA Rule’s inconsistency related to the provision that borrowers are covered if they are associated with the military at the time the account is established and the provision that the safe harbor for determining military status applies if inquiries are made at the time a person applies for a loan or 30 days prior. While not direct stating, the interpretive rule indicates that lenders may rely on information obtained up to the time the loan is made to enjoy the safe harbor.
P. Creditors may use any internet address the DoD provides to access the MLA database to ascertain military status and enjoy the safe harbor. (Q & A #11)
Creditors are not bound to use the internet address provided in the MLA Rule as it may change. In addition, some creditors may arrange with DoD for “direct access” to the MLA database.
Q. Creditors may provide a general description of the payment obligation and are not obligated to provide the payment schedule for closed-end credit or initial disclosures for open-end credit. (Q & A #12)
The interpretive rule provides that: “A creditor may also orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow” (Emphasis added.)
This includes, for example, a general description of how minimum payments are calculated on open-end credit plans and a reference to the written materials the borrower will receive. Alternatively, creditors may “generally describe borrowers’ obligations to make a monthly, bi-monthly, or weekly payment” as applicable. In addition, the MLA Rule does not require that the required written description of the payment obligation be the same as the oral description of the payment obligation.
“Thus, under the Department’s approach, a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transaction accounts.”
In sum, to satisfy the oral disclosure requirement, banks may provide orally:
R. Oral disclosures provided through a toll-free number must be available from the time the creditor provides the toll-free telephone number, which may be at application or with the MLA disclosures. (Q & A #13)
Because the oral disclosures may be generic and general, creditors need not ensure that specific payment information is available through the 800 number before the consumer becomes obligated on the loan. The oral disclosures also need only be available for a period “reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.”
S. Creditors may provide MLA disclosures, including Regulation Z disclosures, after a borrower has become obligated on a transaction under certain circumstances, (e.g. purchase orders or requests made by mail, telephone, or fax) consistent with Regulation Z. (Q & A #14)
This is an exception to the general rule that the MLA disclosures must be provided before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit. The discussion in the interpretive rule focuses on the Regulation Z disclosures that must be provided under the MLA Rule, but concludes with the statement, “Thus, the disclosures required in Section 232.6(a) [which includes all the MLA disclosures, including those unrelated to Regulation Z] may be provided at the time prescribed in Regulation Z.”
T. A creditor qualifies for the safe harbor set forth in 32 CFR 232.5 (b)(2)(i) if the creditor uses an individual taxpayer identification number (ITIN) to search the Department's database to conclusively determine whether credit is offered or extended to a covered borrower. (Q&A #21)
The Department recognizes that while all members of the Armed Forces will have a Social Security Number (SSN), a limited population of dependents, who meet the definition of a covered borrower, may not qualify for a SSN due to their citizenship status. An ITIN is a tax processing number issued by the Federal government in lieu of a SSN and are only available for certain nonresident and resident aliens, their spouses, and dependents who cannot obtain a SSN and can be used in searches of the Department’s database. Accordingly, for purposes of 32 CFR 232.5 (b)(2)(i)(A), an ITIN is a “Social Security number.”