Compliance question of the month: If the bank converts a construction loan to a lot loan can the bank check military status without violating the MLA lookback prohibition?

My bank has some construction-perm loans for which construction has not started. The bank wants to convert these loans to lot loans with the same terms of the construction-perm loans. If the customers accept that option, the loans are subject to the Military Lending Act (MLA) so the bank will have to verify military status.

Q Does checking military status at the time that the loan is converted to a lot loan violate the MLA provision that prohibits “historic lookbacks”?

A It may depend on how the loan is structured.

Under §232.5(2)(B) of the MLA regulation, “after a consumer has entered into a transaction or established an account involving an extension of credit,” creditors may not “directly or indirectly” obtain any information from any database maintained by the DoD “to ascertain whether a consumer had been a covered borrower as of the date of that transaction or as of the date that account was established.” (emphasis added). An initial question then is whether the construction-perm loan or the lot loan is the “transaction” or “account” referenced in the regulation.

The MLA covers “consumer credit” which §232.(f) defines generally as credit offered or extended “primarily for personal, family, or household purposes” unless an exemption applies. In this case, two exemptions are relevant. The first exemption is for certain mortgage loans, that is, loans secured by a “dwelling.” Because lot loans are not secured by a dwelling, they are not exempt under this provision.

Second is the exemption under §232.3(2)(iv) of loans that are exempt from Regulation Z or its disclosure requirements. Thus, for example, if the lot loan is a refinancing requiring new disclosures under Regulation Z, this MLA exemption does not apply, and the lot loan is covered. Accordingly, the date of the account establishment or transaction is the date of the lot loan, and the bank may verify military status for the lot loan without violating the historic lookback prohibition.

If the lot loan is exempt from Regulation Z (e.g., a renewal), it is not consumer credit under MLA. The question then is whether the lot loan and construction-perm loan are the same “transaction” and the answer is not clear from the regulation. If they are, the lookback prohibition would apply which would have an odd result—the loan is covered but the lender may not confirm military status. If they are not the same transaction, however, the bank could check the database as the regulation does not appear to prohibit checking the database for exempt transactions e.g., a renewal that is not covered by MLA—though the DoD or credit bureaus that provide military status may have rules against checking the data base “directly or indirectly” for loans MLA does not cover.

For more information, contact ABA’s Leslie Callaway.
Please note that this section is not a substitute for professional legal advice.