Amendment to Military Lending Act May Present New Opportunities
This blog is posted on behalf of my colleague Justin Robinson, Director of Regulatory Compliance.
On February 28th, the Department of Defense (“DoD”) made an additional amendment to its interpretive rule for the Military Lending Act (the “MLA”). The MLA’s provisions have been challenging institutions since they originally went into effect in 2016 and have left many institutions struggling to make sense of the DoD’s guidance but the recent change presents new opportunities.
Impact on GAP and Other Credit Insurance Products
With the recent amendment, the DoD rescinded the updated Question #2 of the 2016 interpretive guidance and subsequent 2017 amendment and has indicated that it wants additional time to seek clarification. Question #2 had specifically indicated that “a credit transaction that also finances a credit-related product or service” would not be eligible for the exemption from MLA requirements. As a result, financial institutions have been reluctant to offer GAP and other credit insurance products on motor vehicle and other personal property purchases because doing so would trigger MLA disclosures for covered borrowers.
For the past two years, industry groups have been lobbying the DoD arguing that this interpretation is making it difficult for military consumers to obtain GAP insurance when desired. It appears the DoD heard these arguments and decided to rescind the limitation.
What does this mean for financial institutions?
The MLA rule still exists, but the change to Question #2, appears to remove the restrictions of on GAP insurance to MLA covered borrowers in motor vehicle and other personal property purchase loans. Financial institutions who have taken steps to restrict the purchase of GAP insurance for these transactions can now reevaluate whether this is a viable product to offer all of their applicants.
In addition, the DoD reinstated the original Question #2 back into the guidance, which leaves out the reference to GAP and credit-related products, but still indicates that a loan to purchase personal property that provides additional “cash-out” money will lose its MLA exemption status. So, lenders should continue to follow this guidance and carefully evaluate any “cash-out” loans.
Using ITINs to Verify MLA Status
In the new guidance, the DoD has also added an additional Question #21, which clarifies that an ITIN is considered a social security number for purposes of the safe harbor in the MLA. Accordingly, a financial institution can rely on an ITIN instead of social security number in verifying MLA status for dependents of service members.
Next Steps
The Military Lending Act is a complex and can be challenging for institutions to navigate. CLA’s Regulatory Compliance Team is here to help. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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