VIDEO: How to Identify Covered Borrowers Under MLA
In this Compliance Clip (video), Adam discusses how to identify covered borrowers under the Military Lending Act (MLA). MLA provides special protections for active duty servicemembers like capping interest rates on many loan products. In particular, Adam talks about the two safe harbors that the regulation provided in determining a covered borrower.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about how to identify covered borrowers under the Military Lending Act. Keep in mind we have two servicemember lending requirement rules. The first, of course, is the Servicemembers Civil Relief Act, and the second is the Military Lending Act. The difference in these is the Servicemembers Civil Relief Act deals with existing credit where somebody who took out credit some time ago then they become in active duty; while the Military Lending Act deals with new credit, where you have somebody currently in active duty and they’re taking out new credit. So we’re talking here about the Military Lending Act how we identify whether or not they are in active duty in military service.
To do this, the rules tell us that we have two safe harbor options to identify whether or not somebody is a covered borrower. Now these two options are going to vary depending on your financial institution and depending on what you choose to do as far as managing this. But the rules say you have two options.
The first option is to verify whether or not somebody is an active servicemember through the Department of Defense's database at this link (https://mla.dmdc.osd.mil/. You're able to do this but there's certain requirements on having to do this within a certain period of time. But this is a manual process and it's something you can do if you're verifying whether or not they qualify for Military Lending Act provisions for loans that apply to the Military Lending Act. The second option that you can do, which I think is probably a better practice, is to utilize a Consumer Reporting Agency. This is typically an additional feature that you would have to purchase for an additional fee, though that fee can often be passed on to the consumer. So this is where the Consumer Reporting Agency will actually do the Military Lending Act check for you. The trick with this is you probably need to set up your credit reports in a certain way so there's only certain types of credit or actually, from your system pulling the Military Lending Act check. So there are some logistics in setting this up the proper way, but this is typically the easiest way to make sure that you're pulling a Military Lending Act verification every single time on loans that apply.
Now, not all loans apply. We’ll have a second video at some point that talks about which loans do apply to the Military Lending Act, but on loans that apply you do have to verify whether or not somebody is a covered borrower. So these are the two options you have under the rules. I personally think that the second one is easier to manage because you just have it every single time if your system is set up properly to pull it with the credit report. Of course, there's some repercussions if you're reusing credit reports which was problematic for a number of reasons, If you're reusing a credit report you would have some problems with reusing credit reports, but if you pull a new credit report every time and you're doing the Military Lending Act check there then this is probably the easiest route to go.
A couple of things to note, first of all, the rules tell us that historic look backs from the database are prohibited. If you're auditing this or you forget to do a verification you realize it a year later, they do say the historic look backs are prohibited so I would not advise in doing historic look backs. Secondly the Department of Defense has informally said that you should only be using the MLA database for MLA searches. And there is a second database that you should be using for SCRA searches and that, of course, is the SCRA database. So if your financial institution is using the same database for both MLA and SCRA searches, this is not correct. The reason it's not correct is the definitions under the technical rules are slightly different for dependents and some other people who are covered under the rules so you may have somebody actually show up on the MLA database but not on the SCRA database, and vice versa. So it's important that you're using the proper database when you're doing a Military Lending Act check. There's a lot there.
That's all I have for you for this Compliance Clip.