I am trying to understand this process of making a loan that would be secured by a covered borrower. Let's say your loan is for $2,500 for 1 yr. with P&I pmts at 18% APR/MAPR. The loan is consummated and the proceeds of the loan is used to open a 1yr CD that is pledged to the loan. Is that what we're talking about under this regulation?

What are your procedures when using an EXISTING CD of a covered borrower? The FAQs are too poorly written to put a lot
of faith in what we think they say or mean!

We are still working out the details, but I think that if they insist on a CD secured loan, we would have to open a new CD. We would probably waive any early redemption fees, but not sure if we would allow them to keep the same interest rate if it was higher.

So then we can't make a loan to a covered borrow who wants to pledge their existing CD account as collateral until they update the Assignment of Accounts form? is this correct?

Thanks,

Not sure what an "Assignment of Accounts form" is.

The order of operations for an account/cd secured loan would be:

Loan application, approval, open new account or new CD, fund the loan, deposit funds into new account or CD, place hold on the funds.

That's the gist of how we will handle them.

The form provider, Wolters Kluwer, has a form that we use for CD secured loans. They call it "Assignment of Deposit Account"; it assigns and transfers the account to us to use as collateral. They did not update the form to meet the MLA requirements like they did the consumer note. From the above post, they are looking into it. We were wondering if we will not be able to make a CD secured loan to a service member if this form is not updated. do we really need it?

Our CD loans are mostly existing CDs. We don't use the loan proceeds to open the CD.

Thanks,

Does anyone know if ABA or another association is trying to address this with the DoD? This needs to be cleared up so that all banks can feel comfortable with making CD secured loans.

This!

ABA states: "Loans secured by a bank account. Creditors may make loans secured by a bank account to covered borrowers, regardless of when the security interest is taken. (Q&As 17 and 18)"

http://www.aba.com/Compliance/Documents/InitialStaffAnalysisAugust20162.pdf

We are taking the conservative route on this one.

The interpretation goes on to say that the loan must still comply with MLA and the you can take a security interest AFTER the loan is made. We have CUNA, lawyers and our forms vendor all saying the same thing. We will just create a new CD after the loan is made and then secure the funds.

Did I miss the boat or something? Why all the talk about whether or not we will offer this product?

What's wrong with running the check on the borrower, providing the oral disclosure if applicable, and keeping your MAPR below 36%? Where is the burden that I am missing?

There was a discussion about whether the wording of the regulation made it forbidden to have a loan to a covered borrower secured by an existing deposit account. To my knowledge, their FAQs clarified the issue to show that there is no prohibition against doing so.

Okay....I have read this thread three times.....WHERE does the rule say that it is OK to take a lien on an existing account for a servicemember?? I am dense?

The FAQs.

17. 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?

Answer: No. The prohibition in § 232.8(e) does not prohibit covered borrowers from granting a security interest to a creditor in the covered borrower's checking, savings, or other financial account, provided that it is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation including the limitation on the MAPR to 36 percent. As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) prohibits a creditor from using the borrower's account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a post-dated check provided at or around the time credit is extended.

Section 232.8(e)(3) further clarifies that covered borrowers may convey security interests in checking, savings, or other financial accounts by describing a permissible security interest granted by covered borrowers. Thus, for example, a covered borrower may grant a security interest in funds deposited in a checking, savings, or other financial account after the extension of credit in an account established in connection with the consumer credit transaction.

I have read the FAQs (over and over) and that interpretation...that it's OK to take a lien on an existing account....just doesn't seem to be there. Guess I AM dense. Okay....thanks.....now I am following the discussion above about the bad example in Q&A #17 and how it seeming contradicts the initial answer.

thanks everyone.

Looks like we may have posted about the same time swiggles. The answer is in question #17 of the FAQ, which I have posted above.