Military Lending Act… continued

We blogged about the new requirements for the Military Lending Act (MLA) previously.  In summary, the final rule broadens the MLA protections by expanding the range of covered loans, defining a covered borrower, adding more components to the MAPR, placing restrictions on imposing other limitations, and requiring a statement of the MAPR Disclosure.  Compliance with the changes is required by October 3, 2016, and for credit cards – October 3, 2017.

One restriction included in the final rule focuses on security interests.  Standard cross-collateralization clauses, contained in many loan documents, typically permit a security interest to be obtained in shares deposited both prior to and after consummation of the loan and in connection with any share account of the borrower.  These clauses do not comply with the MLA regulations limiting the security interest to shares deposited after the loan is established and to funds that are deposited into an account set up in connection with the loan.

Because Section 232.9(c) of the MLA regulations provides that any credit agreement, promissory note or other contract with a covered borrower that fails to comply with the regulations is void from the inception. Any loan agreement between a credit union and covered borrower that contains only the standard cross-collateralization language and language regarding statutory liens could be considered void and the borrower would not be required to repay any outstanding loan balance.

If the credit union uses cross-collateralization language on its loan agreements, it may wish to create new agreements without the language.