- MLA – the Final Rules
- Amended Article 9 – Using the Correct Debtor Name
MLA – the Final Rule
By Andy Zavoina
It was last October when I last wrote on this topic and described the proposed changes to the Military Lending Act (MLA). The original law was passed as part of the John Warner National Defense Authorization Act for Fiscal Year 2007 and the final amendments to the pending proposal were published July 22, 2015. Absent a banking regulation, the law was implemented by the Department of Defense’s (DoD) Part 232, which is available on the BOL Alphabet Soup page in its current form and with these final changes. A link is at the end of this article.
There is good and bad in the final rule, along with unanswered questions. Here are the key points I think you need to be aware of now.
When you read the revisions to the law one thing you’ll zero in on immediately is the effective date so you know when you need to have the new requirements adopted in your bank. The second page of the 198-page Federal Register document says the effective date is October 1, 2015, but the “compliance required” date is October 3, 2016. It sounds like you can comply later this year but must comply by October 2016. But that isn’t really the case. When you read back to page 197 it says “Except as provided in paragraph (c) of this section, a creditor must comply with the requirements of this part, as may be applicable, with respect to a consumer credit transaction or account for consumer credit consummated or established on or after October 3, 2016, not later than that date.” And the regulation itself at § 232.12(b) clearly says covered loans to covered borrowers are under the old (current) rules until October 3, 2016. The “effective date” is therefore largely meaningless, and you should not make changes until October 3, 2016. It goes on to explain in paragraph 232.12(c), which relates to credit card accounts, that compliance is further delayed until October 3, 2017, and in fact another one year extension may be available for those credit card accounts.
This means you must follow the existing rules for consumer credit until October 3, 2016. You have time to plan, but your 2016 budget will be coming up soon, so plan for it there as well. Credit card accounts will lag by an additional year and possibly up to two years. It’s a good thing that there is time to acclimate to all the TRID changes before you have to worry about these, but it’s unfortunate that there appears to be no optional compliance period. You will have to flip the proverbial switch and change your procedures on a specific date for your consumer loans to the military and their dependents that are not credit cards. It is also bad that after reading the compliance dates stated at the very beginning of the publication that you must also contrast specific requirements that are stated at the end as well. It gets confusing.
I have referred to “consumer loans” already. Let’s look at some definitions and requirements so you will better understand how the new MLA rule will reach farther into your product list than it does now. (The definitions in the regulation go into more specific details than are discussed here.)
Consumer credit. Currently the MLA reaches Reg Z type credits that are for personal, family or household purposes. But the DoD limited the definition to payday loans, vehicle title loans and refund anticipation loans. This was certainly favorable treatment for most banks as the narrowed definition targeted many of the worst offenders that abused servicemembers financially, and these were not banks. But each of these loan products is defined and, for example, a covered vehicle title loan has a term of 181 days or less. The regulation drew a bright line test and some lenders, including banks, established a minimum 182 day term for vehicle title loans so that the MLA restrictions would not apply. New product terms were offered by many lenders to seemingly skirt the MLA protections. The DoD is to review the MLA every two years and ask for input from the regulatory agencies on tweaks that are needed. The revised law and regulation will now reach beyond the major abusers addressed currently. Most banks felt they were not offering the three credit products that are addressed now and the MLA was a minor inconvenience. This is changing.
“Consumer credit” is now defined more broadly and you can no longer avoid a few certain products to avoid MLA requirements. Your loans subject to Reg Z are covered, less residential mortgages and purchase money loans where the property purchased is your collateral. These exceptions apply to vehicles and personal property. While credit card restrictions are delayed, these rules will apply to overdraft lines of credit now.
Covered borrower. As opposed to the Servicemembers Civil Relief Act which has protections on debt taken before the person is serving in the military, the MLA protects those who are already serving. The wording in the regulation is “at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit,” they will meet the first test of being a covered borrower. This protects the servicemember as well as their dependents. The servicemember is someone in the armed forces serving on active duty or active guard and reserve duty. It also protects dependents, which reaches beyond a spouse and children. The 2013 Defense Authorization Bill changed the definition of “dependent” to the same used to determine eligibility for medical and dental care provided to servicemembers’ dependents. It is lengthy but includes a spouse, an unremarried widow or widower, a child under 21, or 23 if that child is a full-time student, parents and in-laws who were dependent on the servicemember for more than half of their support and it extends to those unremarried former spouses who can benefit from the servicemember’s retirement because of the time they were married. It is not a simple task to identify dependents. This definition of dependent also applies to the current rule.
When the customer leaves the service, they no longer meet the first test and are no longer a covered borrower.
Military Annual Percentage Rate (MAPR). You start with a rate of interest. This is generally state-regulated and it is what usury limits are compared to. It is the main component in the loan’s finance charge. Other fees that are a “cost of credit” may be added to the finance charge and under Reg Z that number is calculated and disclosed as an Annual Percentage Rate (APR). The MAPR is similar to the APR, except that more loan fees may be included because there are fewer exceptions under the MAPR definition. For example, Reg Z excludes fees such as the cost of optional credit insurance, but that cost would be included in the MAPR calculation. The MAPR will include “all fees and charges, including charges for single premium credit insurance and other ancillary products sold in connection with the credit transaction . . . “ This means the MAPR is generally higher than the APR.
The MAPR cap will remain at 36 percent, but with more loans now subject to the MLA, banks need to reconsider these fees and the products the regulation will apply to. For practical purposes this is a federal usury limit on loans falling under the MLA.
The rules for credit card products are more cumbersome because of the MAPR and the ease with which this rate can be attained. Imagine a $30 fee being charged and a small $5 balance on an account. Because so few banks are issuing credit cards, and because the credit card rules won’t kick in until at least October 2017, I will reserve the discussion on them until a later date, but there is homework to be done.
Other open-end credit is not exempted in the credit card rules. The MLA resurrects the “historical” or “effective” rate of interest whereby a calculation is based on the fees and interest charged on a balance and reported in the periodic statement. The Federal Reserve Board did away with a similar disclosure in 2009. The DoD however compared the finance charge components and the reasons it was discontinued (primarily it was confusing to consumers and the cost-benefits were not there) to the fact that this is not a disclosure, but a rate cap, and has brought this back. Either tables of rates and charges compared to the balance will have to be used to not exceed 36 percent on these loans, or before the periodic billing is completed a credit may be necessary to avoid exceeding the cap. If there is no balance on an account, no fee (other than a participation or annual fee of $100 or less) will be allowed as it would have to be reimbursed anyway.
While you will need to compute the MAPR to ensure you do not exceed 36 percent, this will no longer be a required numerical disclosure to the borrower. “A creditor may satisfy the requirement…of this section by describing the charges the creditor may impose…” The final rules goes on to say “…this section shall not be construed as requiring a creditor to describe the MAPR as a numerical value or to describe the total dollar amount of all charges in the MAPR that apply to the extension of consumer credit.” Servicemembers can comparison shop loan rates based on the standard Reg Z disclosures which are still required. These Reg Z disclosures also meet another MLA disclosure requirement, being a description of the repayment terms.
Other limitations. There are other limitations contained in the MLA. Your agreements may not: * require a covered borrower to waive rights to legal recourse;
* require the covered borrower to submit to arbitration or impose other onerous legal notice provisions in the case of a dispute;
* use a check or other method to access a deposit account for repayment of a loan. There are exceptions to this section which would appear aimed at the payday lending products that have been targeted by the CFPB and DoD.
* require an allotment of pay for repayment; or
* include any prepayment penalty.
Disclosures. Disclosures must still be made orally and in writing. (The three categories of disclosures discussed separately above include the MAPR statement, Reg Z disclosures, and a description of the repayment terms which is also met with Reg Z. The first and third must be made orally and in writing before consummation.) Those required orally may be given in person or provided with a toll free line. This varies from the proposal that mostly required in-person disclosures.
Covered borrower status. This may be one of the trickiest issues. Lenders may, but are not required to verify the status of an applicant as a covered borrower by accessing the information available at the DoD database website, http://www.dmdc.osd.mil/mla/owa/home. Searches require the servicemember’s full name, Social Security number, and date of birth. The database allows individual inquiries as well as batch file requests. Search results include the status of covered borrowers and can be used to resolve questions creditors may have about the status of an applicant who denies being a covered member and yet presents information during the credit transaction that is contrary to this declaration. This was a noted problem. The DoD found that military applicants believed they may not have a request approved based on their military status so they would intentionally say they were not covered. As a result the new rules will not allow a written declaration.
In addition to the database, a second method that is available to gain a safe harbor is the designation on a national credit bureau report. Lenders may use one or both of these methods.
The problem with the DoD database is that it is not always 100 percent accurate based on user comments. This increased usage will also tax those systems. The DoD added the ability to verify employment for the MLA with a national credit bureau report. But do all your national credit reports include current employment data?
Hopefully they will before the effective date, but will there be an additional fee for this? Also, I’ve already described how far reaching a “dependent” status can be. How will you verify that each and every applicant is not a dependent of a covered person? Currently you can have the signed declaration but that goes away with the new rule.
Inquiring about this may be a requirement even if a form is not obtained as it is today.
This is a brief review of the highlights of the new MLA rule. Certainly there is a lot more detail in the 200 page publication of the final rules. But with these points you can start your early planning and digestion of the rules themselves. The DoD regulation itself is already on the BOL Alphabet Soup page.
Regulation link: http://www.bankersonline.com/regs/jwnda/dod232.html
Amended Article 9 – Using the Correct Debtor Name
By Pauli D. Loeffler
Article 9 of the Uniform Commercial Code (the “UCC”) underwent substantial revisions proposed by the Uniform Laws Commission (the “ULC”) in 1998. The 1998 revisions were enacted in 2000, effective July 1, 2001, and codified in Title 12A O.S. §§ 1-9-101 et seq. The 2010 amendments were drafted by the ULC to provide clarification and guidance regarding filing issues and other matters that have arisen in the years since Revised Article 9 was adopted. The effective date for the amendments is November 1, 2015. This article will focus on the correct debtor name to be used on the financing statement, particularly with regard to individuals. For simplicity, I will refer to the versions as Revised Article 9 and Amended Article 9.
§1-9-102 Definitions and Index of Definitions. The vast majority of definitions in this section remain unchanged, or were amended without changing the underlying gist of the definition. However, there are some entirely new or expanded definitions under Amended Article 9.
(a)(71) “Registered organization.” The definition in Amended Article 9 still includes corporations, limited liability companies, limited partnerships, national banking associations, federal savings associations, federal credit unions, etc. formed or organized under the laws of a single state or the United States, BUT the following language has been added:[B]y the filing of a “public organic record” by, or the enactment of legislation by the state or United States. The term includes a business trust that is formed or organized under the law of a single state if a statute of the state governing business trusts requires the business trusts’ organic record be filed with the state.
Business trusts, Massachusetts business trusts and statutory trusts that come into existence by filing of a record in a public office in which such record is available for public inspection are “registered organizations” under Amended Article 9. This would include public trusts formed under Title 60 O.S. §§ 176 et seq. and entities formed under Title 82 of the Oklahoma Statutes. The definition would not include an entity formed or organized without a required public filing even if it is required to or voluntarily files a public record, such as a partnership fictitious name or statement of partnership authority, trade name filing or records a memorandum of trust with the county clerk. These are NOT registered organizations since formation/legal existence occurs without the necessity of the filings. This definition is crucial to using the correct name on the financing statement.
(a)(68) “Public organic record.” This is an entirely new defined term. A “public organic record” is available to the public and is filed or issued by a state or the United States in order to form or organize an organization or amends or restates the initial filing. It would also include public records of organizations formed pursuant to legislative authority that are “registered organizations” previously mentioned.
§ 1-9-503 Name of Debtor and Secured Party. This section provides detailed rules for determining the correct name for the debtor to be used on the financing statement so that the filing is sufficient and effective. It is critically important that the financing statement reflect the debtor’s “correct name” in accordance with this section in order to avoid the financing statement being “seriously misleading” and, therefore, ineffective.
Other than the name to use on a financing statement for an individual debtor and the broader definition regarding “registered organization,” this section of Amended Article 9 remains unchanged. [The rules generally apply where perfection is through a certificate of title under section 1-9-311(b), but the seriously misleading rule in § 1-9-506(b) would not be applicable because the debtor’s name on the certificate of title is irrelevant to the certificate of title lien entry and could never impair a lien search or notice of the security interest.]
Registered organization. For registered organizations as defined earlier in this article, the correct name to use on the financing statement is the name stated on the most recently filed, issued or enacted “public organic record” of the debtor’s jurisdiction of organization, i.e., the jurisdiction where registration was required for formation.
Decedent estates. If the collateral is being administered by the personal representative in a probate, the name of the decedent is used for the debtor. The name indicated on the order appointing the personal representative of the estate is sufficient as the “name of the decedent.” The fact that the collateral is being administered by a personal representative must be indicated on the financing statement. Failure to provide this latter information would not “substantially satisfy” the requirements of §§ 1-9-502 and 1-9-503, making the filing ineffective.
Trusts. For a trust that is NOT a “registered organization,” which includes revocable and irrevocable grantor trusts, testamentary trusts, etc., if the trust itself specifies the name of the trust, this is the name the creditor will use. In a separate part of the financing statement, the creditor must indicate the collateral is held in trust. If the trust does not specify a name, the creditor shall use the name of the settlor (indicated in the trust) or, in the case of a testamentary trust, the name of the testator (as indicated on the order appointing the personal representative of the estate) and provide additional information sufficient to distinguish the trust from other trusts having the same settlor(s) or same the same testator. The fact that the collateral is held in trust must be indicated elsewhere on the UCC-1. As stated above, failure to provide any required indication or additional information would make the filing ineffective.
Individuals. The creditor shall use the name shown on the unexpired driver’s license issued by the state where the financing statement is filed (ordinarily the state where the debtor maintains his principal residence, with the exceptions that fixture filings, timber to be cut and as-extracted collateral are filed in the county real estate records where the collateral is located). If the debtor has multiple driver’s licenses issued by the state of filing, the name shown on the most recent driver’s license is used. You must use the name shown on the driver’s license even if it is misspelled!
If the debtor does not have an unexpired driver’s license issued by the state where the financing statement is filed, there are two alternatives: 1) use the “individual name” of the debtor (i.e., whatever the debtor’s name is under the current law), or 2) the surname (i.e., family name – previously denoted as “last name”) and first personal name of the debtor. The ULC Code Comments notes that there are certain challenges with regard to the second alternative since in some cultures, the surname appears first and in others it is neither first nor last and the surname may have multiple elements with a space between the surname or be connected by a hyphen, “i” or “y.”
If there is any doubt about an individual debtor’s name, a secured party may choose to file more than one financing statements to provide a number of possible names for the debtor and a searcher may similarly choose to search under a number of possible names.
The location for filing the financing statement for an individual debtor, with a few exceptions, is the jurisdiction where the debtor’s principal residence is located per § 1-9-307. If a debtor’s principal residence changes, the location of the debtor also changes, and perfection by filing ordinarily will be governed by the law of the debtor’s new location. A change in location may also cause a change in the debtor’s name if the name on the driver’s license changes. Likewise, if the license expires, the correct name, i.e., the debtor’s “individual name” or surname and first personal name, may be different. This could also occur if a debtor’s driver’s license is renewed and the names on the licenses differ. As will be discussed in a subsequent article, the application of the state’s § [1-]9-316 provides that a security interest perfected by filing under the law of the debtor’s former location will remain perfected for four months after the relocation, and thereafter if the secured party perfects under the law of the debtor’s new location. Likewise, a financing statement filed in the former location may be effective to perfect a security interest that attaches after the debtor relocates.
If a name change renders a filed financing statement “seriously misleading,” the debtor’s name becomes insufficient under § 1-9-506. Note that including the name of the business of a sole proprietorship on the financing statement is optional, and the failure to provide it has no effect on perfection; however, if the filing uses ONLY business name, even if the sole proprietor has filed a fictitious name form with the Oklahoma county clerk or obtained a trade name by filing with the Oklahoma Secretary of State, it would be “seriously misleading” and ineffective under § 1-9-506.
Non-registered organizations. For this purpose, an “organizational name” would include business entities such as non-incorporated associations (clubs, some churches, etc.), as well as general partnerships and joint ventures which are formed under common law without obtaining a certificate of formation. If an “organization” has no name, which is possible for a general partnership or joint venture, the financing statement must provide “the names of the partners, members, associates, or other persons comprising the debtor in a manner that each name provided would be sufficient if the person were named as a debtor.”
In addition to requiring the debtor’s name and an indication of the collateral, the name of the secured party or the representative of the secured party is required. Amended Article 9 does not require indexing by name of the secured party, but the Oklahoma County Clerk does index this way as well as by debtor, but not all states do. Since indexing by creditor name is not required, searches are not generally conducted under the name of the secured party, thus, an incorrect name of the secured party or an assignment that is not filed does not affect perfection because it is not “seriously misleading” under § 1-9-506. However, use of an incorrect name would be a problem in certain situations such as in floor-planning with inventory now owned and hereafter acquired as the collateral. Failure to amend the financing statement could allow the competing interest to assert estoppel.
§ 1-9-506 Effect of Errors or Omissions. This section remains the same under Amended Article 9:
(b) Except as otherwise provided in subsection (c) of this section, a financing statement that fails sufficiently to provide the name of the debtor in accordance with subsection (a) of Section 1-9-503 of this title is seriously misleading.
(c) If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with subsection (a) of Section 1-9-503 of this title, the name provided does not make the financing statement seriously misleading.
§ 1-9-507 Effect of Certain Events on Effectiveness of Financing Statement. Under Amended Article 9, wording was changed for clarification. If the name on a filed financing statement debtor becomes insufficient under § 1-9-503 of this title so that the financing statement becomes “seriously misleading” under § 1-9-506, unless the financing statement is amended to provide a sufficient name for the debtor, it will only be effective to perfect a security interest in collateral before, or within four (4) months after, the filed financing statement becomes seriously misleading. If the amended financial statement is filed within 4 months of when it became seriously misleading, there is no loss of perfection; however, if the amended financial statement is filed more than four months after the name debtor’s name became seriously misleading, it will only be effective upon filing, and there will be a gap with regard to collateral acquired by the debtor more than four months after the name became seriously misleading.
BUT before you freak out…
§ 1-9-805 Effectiveness of Action Taken Before Effective Date. § 1-9-805 provides:
(a) The filing of a financing statement before this act takes effect is effective to perfect a security interest to the extent the filing would satisfy the applicable requirements for perfection under Article 9 of the Uniform Commercial Code as amended by this act.
(b) This act does not render ineffective an effective financing statement that, before this act takes effect, is filed and satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as provided in Article 9 of the Uniform Commercial Code as it existed before amendment. However, except as otherwise provided in subsections (c) and (d) of this section and Section 22 of this act, the financing statement ceases to be effective:
(1) if the financing statement is filed in this state, at the time the financing statement would have ceased to be effective had this act not taken effect; or
(2) if the financing statement is filed in another jurisdiction, at the earlier of:
(A) the time the financing statement would have ceased to be effective under the law of that jurisdiction; or
(B) June 30, 2018.
(c) The filing of a continuation statement after this act takes effect does not continue the effectiveness of the financing statement filed before this act takes effect. However, upon the timely filing of a continuation statement after this act takes effect on November 1, 2015, and in accordance with the law of the jurisdiction governing perfection as provided in Article 9 of the Uniform Commercial Code as amended by this act, the effectiveness of a financing statement filed in the same office in that jurisdiction before this act takes effect continues for the period provided by the law of that jurisdiction.
What this means is:
a) If the name on the financing statement was the correct name, nothing is required to be done.
b) If the financing statement was filed in Oklahoma and the name would not be seriously misleading under Revised Article 9, the creditor has until the financing statement lapses to amend the name to comply with Amended Article 9, or at least until the time a continuation statement is filed.
c) If the financing statement was filed in another jurisdiction and would not otherwise be seriously misleading, the creditor has until the earlier of the time the financing statement lapses, June 30, 2018 or a continuation statement is filed to amend the financing statement to show the correct name.