Written by Brandy Bruyere, Vice President of Regulatory Compliance
On December 14, 2017, the Department of Defense amended the August 2016 MLA interpretative rule and since then, credit unions have sent us many questions relating to auto loans. We blogged about this shortly after the 2016 rule was published, but the new guidance is causing concern relating to indirect auto lending programs. As a starting point, according to the Minneapolis Federal Reserve, indirect lending transactions are often structured one of two ways. Some loans are originated by the dealer and then purchased by a credit union, and for other loans, the dealer forwards the loan application to the credit union who then originates the loan.
Many credit unions are concerned about how the DoD's interpretation of when a vehicle purchase loan may be a covered loan under the MLA impacts their auto lending including indirect loans. As brief background, the MLA excludes loans that are "expressly intended" to finance the purchase of a motor vehicle or personal property. The August 2016 interpretative rule included "question 2" addressing when a personal property purchase loan with a "cash out" component might be a covered loan for MLA purposes. While this was not specific to vehicle loans, this left some credit unions concerned about whether some vehicle purchase loans could be covered by the MLA since these exclusions are written nearly identically. However, it also seemed reasonable to conclude the August 2016 guidance was limited to the exception for personal property purchase loans given how specifically the guidance was written.
The DoD amended the "question 2" guidance so that vehicle purchase loans are MLA covered loans if the loan includes financing for a "credit-related product or service" such as Guaranteed Auto Protection (GAP) insurance or credit insurance premiums. If a vehicle loan is an MLA covered loan, this can be problematic for many auto loans originated through indirect lending programs, particularly where the dealer originates the loan, because the MLA prohibits most lenders from taking a security interest in a motor vehicle:
232.8 Limitations.
Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which:
[…]
(f) The creditor uses the title of a vehicle as security for the obligation involving the consumer credit, provided however, that for the purposes of this paragraph, the term “creditor” does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union.
Creditors like federally and state chartered credit unions can take a vehicle title as security for an MLA covered loan, but other lenders cannot. This may make it difficult for some indirect lending programs where the dealer originates the loan to provide services like GAP insurance to MLA covered borrowers. If a dealer originates a loan to a MLA covered borrower that finances a credit related product, it seems that loan would be unsecured. We heard that some states (e.g., LA, NY) have requirements relating to GAP insurance or waiver products, so credit unions may want to check for state laws that may address the issue.
Further complicating things, while the effective date of the second interpretative rule is December 14, 2017, the DoD's position is that that this rule simply states "preexisting interpretations of an existing regulation." This may be because interpretative rules are not subject to the notice and comment period that is required for other types of rulemakings. Without framing amendments to the guidance as a preexisting interpretation, the DoD would have been required to seek public comments on the issue – although that may have prevented some of these consequences that are making it harder to serve MLA covered borrowers.
NAFCU has shared several concerns about this second interpretative rule with the DoD and other regulators as well as on Capitol Hill. In a joint letter with the Defense Credit Union Council, NAFCU also formally asked the DoD to rescind the "question 2" guidance altogether. We will keep credit unions posted of any changes that may result from these efforts. In the meantime, some credit unions have worked with indirect lending partners on how to address situations where a vehicle purchase loan is an MLA covered loan.
For more information, NAFCU members can look forward to the March edition of the Compliance Monitor coming out later this week, and can access a redline of the MLA interpretative guidance here.
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ICYMI – SCRA Foreclosure Provision Extended. We had a few credit unions asking about the provision in the Servicemembers Civil Relief Act that prohibits the sale, foreclosure, or seizure of a servicemember's home for a year following his or her return from active duty. The time period will remain one year after return from active duty through January 1, 2020.
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To Our Readers at State Chartered Credit Unions – Speaking of NAFCU members, did you know state chartered credit unions can join NAFCU? One of our core member benefits is our compliance assistance program, where our members can reach out to our team with federal compliance questions and receive a detailed, thorough, and specific response no later than the same time the following business day. We also have a monthly newsletter, a quarterly BSA newsletter, and have also helped state chartered members with other issues like filing an amicus brief in a recent ADA lawsuit. You can find more information here, and in the meantime check out some of our resources that are available to nonmember credit unions on our website:
- The Americans with Disabilities Act – Potential Risks for Credit Union Websites (March 2017, predating recent changes in the litigation risk landscape)
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