CM Loanliner & Dep't. of Defense’s Military Lending Act Regulation Posted by Association of Vermont Credit Unions on 5:00 PM

As credit unions prepare to comply with the Department of Defense’s Military Lending Act (MLA) final rule by the October 3, 2016 (applies to closed-end credit transactions and open-end credit accounts, except credit card accounts, whose compliance deadline is October 3, 2017), credit unions may wonder how to provide the required disclosures for covered credit and the best approach to document such loans and credit accounts. After extensive research and careful consideration of the various risks, CUNA Mutual Group has expanded the LOANLINER® consumer lending document portfolio to provide MLA-compliant versions of the lending documents that may be used for credit covered by the MLA final rule.

The final rule requires specific disclosures to covered borrowers and prohibits certain contract terms, including mandatory waivers of rights afforded by state or federal law, mandatory arbitration, establishing a mandatory allotment to repay the obligation, prepayment penalties, and the creation of a broad security interest in all of the member’s shares in the credit union. If the credit contract used for covered credit violates the final rule, the agreement is void from inception and several other penalties may be imposed, even if the violating provision is not enforced by the credit union. These penalties include actual damages of not less than $500 per violation, punitive damages, equitable and declaratory relief, an obligation to pay the court costs and attorneys’ fees incurred by the covered borrower, and even imprisonment, in the case of knowing violations.

Simply adding the required MLA disclosures to the credit agreements currently used by credit unions would satisfy the disclosure requirements of the final rule, but this action would not remove prohibited contract terms from the agreement. Similarly, using an addendum to the existing credit agreements would satisfy the disclosure requirements, but the underlying agreement would violate the final rule due to the contract terms contained therein.

With either of these two approaches, attempting to limit the application of prohibited terms to only those borrowers who are not MLA covered borrowers creates significant risks. The contract may inadvertently violate the MLA final rule, resulting in the contract being declared void from inception and the imposition of the other significant penalties mentioned above. In addition, the member may not understand which terms apply to his or her loan, which can be considered a deceptive practice and could lead to an Unfair, Deceptive or Abusive Acts or Practices (UDAAP) claim against the credit union. The Consumer Financial Protection Bureau (CFPB) has issued UDAAP guidance providing that a statement or information may be misleading, and as a result deceptive, if even only a minority of consumers would be misled by it. In addition, if the representation or statement conveys more than one meaning to reasonable consumers, it can be considered deceptive.

As a result, if the credit agreement could be interpreted by a reasonable consumer in more than one way, it could be considered deceptive. For example, if LOANLINER® had provided one agreement to be used for all credit, which provided one set of terms for MLA covered borrowers and a second set of terms for all other borrowers, and a member could be misled as to which set of terms applies to his or her loan or account, credit unions using that document could be subject to UDAAP claims. A member may not understand whether he or she is a covered borrower under the MLA, particularly in the case of a dependent of a covered member, making it relatively easy for the member to misinterpret which terms apply to his or her loan.

In determining the best solution for LOANLINER® documents, and considering the potential for UDAAP claims, CUNA Mutual Group also took into account the fact that the CFPB, National Credit Union Association (NCUA) and Federal Trade Commission (FTC) each have authority to enforce UDAAP, and the CFPB has shown its increasing willingness to rely on UDAAP as an enforcement tool. Through CFPB's online consumer complaint system, any consumer may file a complaint, whether or not the financial institution is directly regulated by CFPB, so the CFPB may quickly be made aware of potential UDAAP violations and MLA violations by any creditor.

Finally, as UDAAP enforcement actions are publicly available, usually widely reported on, and incredibly damaging to an institution's reputation, CUNA Mutual Group views the risk of providing one LOANLINER® document for all consumer credit transactions as unacceptably high. The prudent course of action is to use specific MLA-compliant documents for MLA covered transactions.

The above information was provided by CUNA Mutual's LOANLINER compliance department.