Written by: Reginald Watson, Regulatory Compliance Counsel
Greetings regulatory compliance world! The U.S. Department of Defense (the Department) has issued it's second MLA interpretive rule which further develops the first interpretive Q&A guidance by adding clarifying language to three questions and creating an additional question and answer. Last week, Stephanie blogged about the amendments to question 2 in the Simultaneous Loan Edition and this post will discuss the remaining amendments to questions 17 and 18 referring to security interests and statutory rights as well as the newly created question 20 which explains the timing requirements of the optional safe harbor.
Security Interests and the Statutory Lien
In the past, we have blogged about the Military Lending Act Rule (MLA Rule) and some of the problematic language in section 232.8(e) which under some interpretations could have limited the covered borrower's right to grant a security interest to credit unions, or a credit union's right to enforce the statutory lien. Questions 16, 17, and 18 of the first MLA interpretive rule clarified that the prohibition in Section 232.8(e) neither prohibits share secured loans or credit unions from exercising statutory lien rights. Instead, it is intended to prevent creditors from creating remotely created checks or remotely created payment orders in order to collect payments from a covered borrower.
The recent amendments to question 17 and 18 do not change this interpretation, but rather clarify any issues that may arise when the MLA conflicts with other federal or state laws. For each question, the Department simplified the language permitting share secured loans and the statutory lien, and added a note explaining that "the MLA does not preempt any State or Federal law, rule or regulation to the extent that such law, rule or regulation provides greater protection to covered borrowers than the protections provided by the MLA." Thus, although the MLA permits borrowers to convey a security interest for all types of consumer credit, the transaction will still be governed by all other relevant federal or state laws, rules and regulations. Similarly, in situations where the credit union seeks to enforce the statutory lien, the credit union may exercise this right "provided the creditor’s actions are not prohibited by other State or Federal law, rule or regulation."
Optional Safe Harbor
The newly created Question 20 addresses the timing requirements for verifying a consumer's covered status under the optional safe harbor found in 32 C.F.R. §232.5(b). Section 232.5 creates an optional safe harbor which allows a credit union to conclusively determine that a consumer is "covered" by verifying their military affiliation via the Department's database or a consumer report "solely at the time a consumer applies to establish the account or 30 days prior to that time…" Question 20 clarifies how credit unions can qualify for the safe harbor by verifying that the borrower is covered at any time during the 30 days preceding the time at which a consumer either initiates the transaction or applies to establish an account:
20. To qualify for the optional safe harbor under 32 CFR 232.5(b)(3), must the creditor determine the consumer’s covered borrower status simultaneously with the consumer’s submission of an application for consumer credit or exactly 30 days prior?
Answer: No. Section 232.5(b)(3)(i) and (ii) permit the creditor to qualify for the safe harbor when it makes a timely determination regarding the status of a consumer at the time the consumer either initiates the transaction or submits an application to establish an account, or anytime during a 30-day period of time prior to such action. Therefore, a creditor qualifies for the safe harbor under § 232.5(b) when the qualified covered borrower check that the creditor relies on is conducted at the time a consumer initiates a credit transaction or applies to establish an account, or up to 30 days prior to the action taken by the consumer. Similarly, the timing provisions in § 232.5(b)(3)(i) and (ii) permit a creditor to qualify for the safe harbor when it conducts a qualified covered borrower check simultaneously with the initiation of the transaction or submission of an application by the consumer or during the course of the creditor’s processing of that application for consumer credit.
(emphasis added)
Accordingly, credit unions may verify the military affiliation of a prospective customer at any time starting 30 days before the consumer initiates a transaction or applies for an account. Furthermore, the interpretive guidance extends this time period throughout the course of the creditor's processing of an application for consumer credit in order to qualify for the optional safe harbor.
NAFCU's Regulatory Compliance Team is continuing to review the guidance to understand its full impact on credit unions and will make necessary updates to our Military Lending Act Compliance Guide in the coming weeks. NAFCU members can download our currently available MLA-related resources here.
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