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DoD is proposing to amend the regulation implementing the Military Lending Act, also referred to as the MLA, to ensure continued access to reasonable credit by Service members and families to finance a motor vehicle purchase and reduce the burden and risk to business of potentially extending unsecured credit for such transactions.  The MLA, as implemented by the regulation, provides two broad classes of requirements applicable to a creditor.  First, the creditor may not impose a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower ("interest-rate limit"); second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information (e.g., a statement of the MAPR), both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account, refraining from requiring the covered borrower to submit to arbitration in the case of a dispute involving the consumer credit, and refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit (collectively, "other MLA conditions").  Other prohibited terms and conditions include the use of the title of vehicle as security for that obligation unless the creditor is chartered or licensed under Federal or State law as a bank, savings association, or credit union.  The regulatory construct of this language prohibits a creditor from using the title of a vehicle as security for the obligation in a bona fide motor vehicle sales transaction unless the initiating creditor, and any subsequent assignees, are chartered or licensed under Federal or State law as a bank, savings association, or credit union.  Such a construct prohibits certain classes of creditors and assignees from or issuing secured credit to facilitate the bona fide credit sale of a vehicle.  The proposed change to the regulation is limited to this technical adjustment to allow certain classes of creditors to continue to offer reasonable credit terms to MLA covered borrowers to finance the bona fide purchase of a motor vehicle under certain conditions where a loan with proceeds used for multiple purposes may not qualify for the limited vehicle purchase loan exception in the statue and regulation.  

Statement of Need:

Without a technical adjustment Service members and families may not be offered credit, or offered credit at increased rates, to cover a creditor’s increased credit risk for providing an unsecured loan to finance a motor vehicle purchase transaction when financing is not expressly intended to finance the vehicle being purchased.

Summary of the Legal Basis:

This rule is proposed under the authority at 10 U.S.C. 987, which requires the Secretary of Defense to prescribe regulations to carry out this section.

Alternatives:

No alternatives were considered. Due to the regulatory construct of the language pertaining to the vehicle title restriction, the Department, in consultation with the prudential regulators, determined that a technical modification to the regulatory language is the only means to properly address this issue.

Anticipated Costs and Benefits:

Cost and benefits have yet to be determined.  One of the intended outcomes of the Proposed Rulemaking process step is to solicit cost and benefit data to inform the final rulemaking.  The Proposed Rule will solicit impacts on all sizes of business entities to include small entities as well as covered borrowers.

Risks:

If this proposed change is not made, Service members and families, under certain conditions, may be denied access to reasonable credit due to their status as a covered borrower, adversely affecting their desire to remain in the service and the unintended consequence of contributing to retention readiness related issues.