The DoD’s rule and interpretive guidance are subject to multiple interpretations on this point. In our view, the more reasonable interpretation is that the rule does not prohibit a bank’s right of setoff.

Section 232.8(e) prohibits a creditor from using “a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower.” We understand that this language may be interpreted to prohibit a bank from accessing a covered borrower’s account in order to exercise a setoff. However, we believe that this is simply a case of ill-conceived drafting and that the DoD did not intend to eliminate a bank’s right of setoff for covered loans.

The DoD’s interpretive guidance in Q&A No. 18 specifically addresses a creditor’s statutory right to take a security interest in a covered borrower’s accounts. However, we note that a security interest arguably is different than a right to setoff. Consequently, this guidance does little to clarify a bank’s right to a setoff in light of the prohibition in Section 232.8(e).

Both we and several other trade associations have attempted to contact the DoD for clarification on this and other points in the MLA but have received no response or indication that additional guidance is forthcoming. Until the DoD issues clarifying guidance, your question on the MLA remains  open to varying interpretations, so we do recommend that you consult with your bank counsel for further assistance in interpreting the rule and its guidance in this regard.

For resources related to our guidance, please see:

• MLA Regulations, 32 CFR 232.8(e) (It is unlawful for a creditor to extend consumer credit to a covered borrower where “[t]he creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower. . . .”)

• Department of Defense Interpretive Guidance, MLA Q&A #18 (Permits creditors to exercise “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.”)