Regulatory Update: Servicemember Lending

1/4/2018 - By Stephen Helms-MacBeth, CRCM, CAFP & Sarah Oliver, CRCM

Updated 4/10/2020 - This article has been revised to reflect an amended Interpretive Rule by the Department of Defense as published in the Federal Register on February 28, 2020.

Recently, new regulatory updates have been enacted that impact servicemembers and financial institutions. Stephen Helms-MacBeth explains how the National Defense Authorization Act for FY 2018 signed into law by the President impacts servicemembers, while Sarah Oliver offers insight on the new and amended Q&As in the revised Interpretive Rule for implementing the Military Lending Act (MLA).

Servicemembers Civil Relief Act (SCRA) Notice

The National Defense Authorization Act for Fiscal Year 2018 legislation was recently signed into law by the President. Section 557 – Temporary Extension of Extended Period of Protections for Members of Uniformed Services Related to Mortgages, Mortgage Foreclosure, and Eviction amended Section 710(d) of the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 and extended the date to December 31, 2019. Meaning that for another two years, servicemembers will be entitled to the protections for one year beyond the end of their active duty service. The wording in the current HUD-SCRA delinquency notice that is provided with past due mortgage notices will remain accurate. The current notice can be used past the December 31, 2017 expiration date.
~ Stephen Helms-MacBeth, CRCM, CAFP

DoD Amends Military Lending Act's Interpretive Rule

On December 14, 2017, the Department of Defense (DOD) amended its August 26, 2016 Interpretive Rule that had been issued to help creditors comply with the July 2015 Final Rule implementing the Military Lending Act. The December 14, 2017 revised Interpretive Rule was consistent with the original format of questions and answers (Q&As), and in addition to revising the guidance on three questions, it added a fourth (#20).

Effective February 28, 2020, the DOD amends yet again its formally revised Interpretive Rule with a new Interpretive Rule that effectively is reverting back to the original Q&A #2 published in the August 26, 2016 Interpretive Rule. The DOD indicates its latest action is to allow for additional analysis on the matter of extending credit for the purpose of purchasing a motor vehicle or personal property when the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property. The Department received several concerns regarding its December 14, 2017 Interpretive Rule that stated the interpretation would prohibit creditors from taking a security interest in vehicles in certain circumstances and creditors may not extend credit if they could not take a security interest in vehicles being purchased.

The February 28, 2020 Interpretive Rule also adds Q&A #21, to confirm that the use of Individual Taxpayer Identification Numbers (ITIN) to identify covered borrowers in the Department's database is the equivalent of using a Social Security Number (SSN).

Amended Q&As
#2 (reamended February 28, 2020) – Question changed to read “Does credit that a creditor extends for the purpose of purchasing personal property, which secures the credit, fall within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(iii) where the creditor simultaneously extends credit in an amount greater than the purchase price?"

The reinstated Q&A #2 states 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 under §232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.” The issue of financing credit insurance products such as GAP insurance, as part of motor vehicle or other personal property credit transactions is no longer addressed

#17 – Question itself remains unchanged “Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from granting a security interest to a creditor in the covered borrower’s checking, savings or other financial account?”

The DOD has clarified that while the answer is generally “no,” creditors should also note that “32 CFR 232.7(a) provides 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.” This should be nothing new to us seasoned compliance professionals.

#18 – Question updated to add the words I’ve included here in bold font. “Does the limitation in §232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit a creditor from exercising a statutory right, or a right arising out of a security interest a borrower grants to a creditor, to take a security interest in funds deposited within a covered borrower’s account at any time?”

The DOD further clarified that although a creditor is prohibited from using postdated checks, or the borrower’s account information to produce a remotely created check or payment order with intent to collect payments on consumer credit from a covered borrower at or around the time credit is extended, as discussed in Q&A #17, under certain circumstances Federal or State statutes may grant creditors statutory liens on funds deposited within covered borrowers’ asset accounts. Section 232.8(e) does not prohibit a creditor from exercising rights to take a security interest in funds deposited into a covered borrower’s account at any time, including enforcing statutory liens, provided that it is not otherwise prohibited by other applicable law and the creditor complies with all other provisions of the MLA regulation, including the limitation on the MAPR to 36 percent.

New Q&As
#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?”

The DOD clarifies the answer to be “no.” A creditor qualifies for the safe harbor when a qualified borrower check is conducted as to 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.

#21(February 28, 2020) - “Does a creditor qualify for the safe harbor set forth in 32 CFR 232.5(b)(2)(i)(A) 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, and thus may be subject to 10 U.S.C. 987 and the requirements of 32 CFR 232.5(b)?”

The DOD clarifies the answer to be “yes.” It recognizes that while all members of the Armed Forces will have a 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. The Q&A confirms that the use of an ITIN to identify covered borrowers in the Department's database is the equivalent of using a SSN for purposes of qualifying for the MLA safe harbor provision.

~ Sarah Oliver, CRCM

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