MLA- Loans secured by CD or savings accout

Making sure I'm on the right page...

If a "covered borrower" wants to pledge their certificate of deposit as collateral on a consumer purpose loan to purchase a ATV. The Bank could not make the loan because the funds in the CD were deposited before the Loan was made?

Correct. The only "way around" this would be to fund the loan, then open the CD account and have the customer make a deposit. But not really sure anyone would want to do this...

Many of us are still hoping this and other issues will be corrected in some way prior to Oct 3rd, but I fear the DoD may be focused on that date and not the prep that has to be done in advance.

As it stands now, CULady is spot on and I'd see nothing but problems trying to take collateral after a loan is closed.

I want to make sure I am following this correctly. I failed to identify this in my initial review of the final rule.
Is this based off the following section ?

232.8
Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a
covered borrower with respect to which:

(e) The creditor uses a check or other method of access to a deposit, savings, or other
financial account maintained by the covered borrower, except that, in connection with a
consumer credit transaction with an MAPR consistent with § 232.4(b), the creditor may:

(3) If not otherwise prohibited by applicable law, take a security interest in funds
deposited after the extension of credit in an account established in connection with the
consumer credit transaction.

Jade - Yes, that is correct.

One idea I had just now when trying to wrap my head around this was to open a savings account while making the loan. I think this would be 'in connection with the consumer credit transaction' and then we could deposit the loan proceeds into said account when the loan is funded.

Albeit this is far from ideal do you think this would work?

You could, but you wouldn't be able to secure the funds until after the loans was made.

232.8(e) ... the creditor may:
(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction.

You would have to fund the loan, then take the deposit, then secure the funds in the account. IMHO, it's just not worth it. Until something changes, servicemembers and their dependents will not be allowed share/cd secured loans.

Thanks CULady. It's very unfortunate that we're having to do this to our servicemembers. I'm all for their protections but this is too much.

Along this same topic... What is everyone going to do if a covered borrower applies for one of the products? We were thinking we would have to send an adverse action, but what the heck do you put for an explanation?! Possibly... "Loan product not available to military members and their dependents as prohibited by the Military Lending Act.”

Any other suggestions, thoughts?

And on our website, should we put something on the CD/Savings secured products that not everyone will qualify or that it is not available for covered borrowers...? I don't really want to point out that they can't have them, but I don't want them applying for a product that isn't available for them either!

Ugh, this whole thing is so messy!

I was thinking of putting it on the DOD:

"We are prohibited by the Military Lending Act from offering this loan product to active military customers and their dependents."

I certainly don't want anyone thinking the Bank is discriminating against military!

With loans secured by a CD or Savings account not even allowed, would the same concept apply to other financial accounts that the borrower may have? For instance, would a loan secured by stock, a life insurance policy or an investment account fall under the same prohibition and not be allowed?

The prohibition on CD- and savings-secured has to do with the prohibition about access to accounts. And that may go away if the DOD decides to clarify their intent--or it may not.

I don't believe it would apply to loans secured by stock or life insurance, but I don't know about "investment accounts", which I suppose could be considered an "other financial account". The relevant verbiage (repeated from above) is:

232.8
Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which:

(e) The creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR consistent with § 232.4(b), the creditor may:

(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction.

DOD?

All I can come up with is Department of Defense... And I am pretty sure you aren't putting it there... And it is weird to think that so many of these rules are creating issues where we feel like we are legally being told to discriminate against them!

Yea, actually I am putting it on the Department of Defense. As in, blaming them! (I finally figured out you were confused because maybe the DOD was some kind of document...)

These regulations are being put out by the Department of Defense, not by the banking regulatory agencies. Therein is the problem - the DoD is not used to writing banking regulations, so in their attempt to do so they have failed miserably, yet are at this point unwilling or unable to walk back any of the identified issues including the fact that the unintended consequence of the way they phrased the restrictions on access to a deposit account results in an inability of financial institutions to make a CD secured loan to a military servicemember or their dependent.

Haha, okay that makes so much more sense! I was indeed trying to figure out what kind of document DOD was! LOL! Ugh... It's been a long week.

An adverse action could be offered and I don't think its a bad idea pointing the finger at the DoD, but the AAN isn't required based on 1002.2(c)(2)(iv):

https://www.bankersonline.com/regulations/12-1002-002

(2) The term does not include:

(iv) A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or

When a person requests that deposit secured loan, this prohibition stands in the way.

Does anyone have any sort of implementation checklist and/or procedures they would be willing to share?

This may be a dumb question, but I don't really understand WHY a CD/savings secured loan is prohibited. What is the reasoning behind this? I need to explain it to my consumer loan operations and know they are going to question it.

Questions can be sent to the DoD.

Reading between the lines I believe that section was to thwart payday lenders who take a post-dated check. But the law was erroneously written with a broader stroke and now we have the case of unintended consequences.

I agree with you Andy. Until we get something in writing we will not be doing CD or Savings secured loans for covered borrowers. Hopefully they'll issue guidance clarifying this and other sections sooner rather than later.

This rule was very poorly written. I've read the actual rule and interpretation a couple times and some portions are still as clear as mud.

So frustrating! We offer CD/savings secured loans so consumers have the opportunity to build/re-build credit and now military folks can't do that.

Trying to figure out a way to make this work.....

Since our normal process for CD secured loans is to have the borrower sign docs, then place a hold on an established CD (funds are already in the bank) when the loan is booked, could we continue offering this product? Do you think that would be considered "after the extension of credit"?

232.8(e) ... the creditor may:
(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction.

No, that wouldn't work. The funds themselves would have to be deposited after the extension of credit.

I don't believe your security agreement could reference the funds. It would have to be an additional task of after consummation, executing a security agreement. That's risk, cost and at the slightest indication that t"his is how this loan works," UDAAP.

Perhaps when you send the borrower away you indicate that they need to complain about this.

It looks like today's Q&A release by the DOD may have addressed this if I'm reading it correctly. https://www.gpo.gov/fdsys/pkg/FR-2016-08-26/html/2016-20486.htm

17. Does the limitation in Sec. 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 Sec. 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, Sec. 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.

18. Does the limitation in Sec. 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 to take a security interest in funds
deposited within a covered borrower's account?

Answer: No. Under certain circumstances federal or state statutes
may grant creditors statutory liens on funds deposited within covered
borrowers' asset accounts. For example, under 12 U.S.C. 1757(11)
federal credit unions may ``enforce a lien upon the shares and
dividends of any member, to the extent of any loan made to him and any
dues or charges payable by him.'' As discussed in Question and Answer
#16 of these Interpretations, Sec. 232.8(e) serves to prohibit 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) describes a permissible activity under Sec.
232.8(e). However, the fact that Sec. 232.8(e)(3) specifies a
particular time when a creditor may take a security interest in funds
deposited in an account does not change the general effect of the
prohibition in Sec. 232.8(e). Therefore, Sec. 232.8(e) does not
impede a creditor from exercising a statutory right to take a security
interest in funds deposited in an account at any time, provided that
the security interest is not otherwise prohibited by applicable law and
the creditor complies with the MLA regulation, including the limitation
on the MAPR to 36 percent.

Yes, see the thread right above this thread.