By Michael Coleman, Director of Regulatory Affairs, and Quincy Enoch, Military Liaison
In talking to credit unions about the impact of a recently proposed rule from the Department of Defense (DoD) regarding the Military Lending Act (MLA), many credit unions have noted that they have very few servicemembers in their membership or they don’t have any products that are over the 36% lending cap. Unfortunately, neither of those facts have a major impact on the compliance burden caused by the proposed MLA rule.
The real question credit unions should be asking is, “Do we offer credit cards, signature loans, traditional lines of credit, overdraft lines of credit or essentially any unsecured credit of any kind?” If so, then the MLA rule most definitely impacts your credit union.
The rule requires not only that covered products (which the rule defines as “consumer credit”) remain under a 36% “military annual percentage rate” but also that servicemembers receive special disclosures when consumer credit is extended to them. Under the proposed rule consumer credit is defined as all credit extended to servicemembers and dependents except mortgages, loans secured by personal property or loans for vehicle purchase. The definition includes essentially all unsecured lending. This is a significant expansion of the definition of consumer credit, which currently has a targeted focus on payday loans, vehicle title loans, and tax refund anticipation loans.
The true compliance burden stems from the fact that the rule places the responsibility of identifying servicemembers on the lender. That means anytime a member comes in to obtain consumer credit it is the responsibility of the credit union to have a method in place to determine if that member is a servicemember or not. The rule allows flexibility regarding methods to determine the status of an applicant, but the lender is only granted a safe harbor if the lender checks the Defense Manpower Data Center (DMDC) database. This means that credit unions will need to integrate checking the DMDC into their systems before issuing any consumer credit to ensure compliance and obtain the safe harbor. Another significant problem with using the DMDC for a safe harbor is that the DMDC has not functioned properly recently, and the proposed rule would exponentially increase the number of searches the DMDC would need to handle. So the question then is, what do you do to obtain the safe harbor if the DMDC is down? Right now, it’s not clear.
Unfortunately, this only gets you half way to complying with the rule because there is an actual knowledge provision as well. The provision states that if the lender has actual knowledge of the status of the servicemember or dependent, the safe harbor will no longer be in effect. This mean that credit unions will also need to setup an internal database or procedures to check what the credit union actually knows as well, because if a servicemember presents you with a military ID when opening a joint account for himself and his spouse, the credit union then has actual knowledge that both the servicemember and spouse are covered borrowers for the purpose of the MLA rule.
The bottom line is that even if you do not have servicemembers in your credit union’s field of membership, this rule will have a significant impact on your credit union. It might affect the types of credit products that you are able to offer members of the military, and it definitely will increase compliance costs and operational burdens. Credit unions have a strong history of providing excellent service to servicemembers and safe credit products that meet their needs, which makes getting this rule right essential. NAFCU has issued a regulatory alert, and will submit comments to the DoD. We sent a letter to the NCUA on the proposal to express some initial credit union specific concerns, and called on the DoD to extend the comment period for the proposed rule. We’ve also joined other industry efforts related to the DoD proposal. Check out the Chairman’s Corner article in the most recent NCUA Report where Chairman Matz noted that NCUA will provide comments formal to the DoD on the rule.
Thank you Credit Union-Land! This is just Mike talking now. Today is my last day with NAFCU, and I can’t say it loud or often enough, I am incredibly thankful to NAFCU for all the opportunities over the past several years, and for the best group of colleagues around. From my days in Compliance with Steve, JiJi, Bernadette, and Shari, to my current role as Director of Regulatory Affairs with Alicia, Angela, Megan, and PJ, and my time with all of NAFCU's government affairs team, I couldn’t have asked for a better group of people to work with to help NAFCU members and the credit union industry. And working for and learning from Dan, Fred, Carrie, and Anthony has been an incredible experience.
And of course, many thanks to the best members around. It’s impossible for me to describe how many devoted credit union people I have met along the way. I’ve talked to many of you directly, whether in person at conferences, or over the phone, via email, you name it. And the most common theme I have seen is that credit union people care. They care about their credit unions and they care about the credit union movement. It’s been an honor working with you, and I promise I won’t be a stranger! Thanks again for everything.