We are implementing an unsecured consumer loan product for which borrowers must apply using a smart phone app. The app uses an automatic underwriting model that allows for credit decisions to be made and funded at any time of day. We are aware that the Military Lending Act (MLA)’s rules require certain disclosures to be made orally, either in person or using a toll-free number. However, if a consumer using the app to apply for credit calls the toll-free number outside of our normal business hours, no one will be available to take their call and provide the disclosure. Are you aware of any guidance addressing the use of pre-recorded messages to provide oral disclosures in such situations?

No, we are not aware of any guidance addressing the use of a pre-recorded message to fulfill the MLA’s oral disclosure requirement. Since the Department of Defense has released guidance confirming that creditors can fulfill the oral disclosure requirement with a generic message that does not provide any loan-specific information, we believe it may be possible to pre-record a message that contains the necessary oral disclosures. However, since we are not aware of any authority sanctioning this practice, you may be undertaking some risk if you choose to make disclosures in this fashion.

The MLA requires creditors to provide covered borrowers with certain disclosures, including a statement of the Military Annual Percentage Rate (MAPR) applicable to the extension of credit and a description of the borrower’s payment obligation, “before or at the time the borrower becomes obligated on the transaction or establishes an account for consumer credit.” These two disclosures must be delivered in writing and orally, and the oral disclosures may be provided with “a toll-free telephone number . . . to deliver the oral disclosures to a covered borrower” when they contact the creditor for this purpose — provided the toll-free number is included on the form the consumer is given to apply for the credit or on the written disclosures.

The Department of Defense’s interpretive guidance on the oral disclosure requirement states that when providing a toll-free telephone number, the “information must be available from the time the creditor provides the toll-free telephone number . . . for a duration of time reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.” Consequently, if you will be approving loans to covered borrowers twenty-four hours a day, we believe the toll-free number also would need to be available to provide the oral disclosures twenty-four hours a day.

Regarding the content of the oral disclosures, the Department of Defense has confirmed that the mandatory oral disclosures allow “for a nonnumeric statement of the MAPR and a generic, clear description of the payment obligation.” Further, the oral description of the payment obligation does not have to be the same as the description provided in writing, and a creditor can “orally provide a clear description of the payment obligation . . . by providing a general description of how the payment obligation is calculated” or “generally describe how minimum payments are calculated on open-end credit plans issued by the creditor and then refer the covered borrower to the written materials the borrower will receive in connection with opening the plan.” The Department of Defense also has noted that “creditors may choose a variety of acceptable oral disclosure compliance strategies” and “a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.”

Taken together, these statements indicate that you may be able to provide the required oral disclosures through the same generic message for all covered borrowers — which in theory could be accomplished with a recording. However, when we contacted the Department of Defense’s Office of Financial Readiness to confirm this theory, the representative we spoke with said he was unable to provide guidance on specific details of the regulation and suggested that bank examiners may have more insight on this issue. He also noted that that the Department of Defense may be meeting with the banking regulators to discuss the MLA and determine whether additional clarification is needed. Consequently, while guidance on this question may be issued in the future, there appears to be no present authority addressing whether oral disclosures may be provided using a pre-recorded message.

For resources related to our guidance, please see:

MLA Rules, 32 CFR 232.6(a) (“With respect to any extension of consumer credit (including any consumer credit originated or extended through the internet) to a covered borrower, a creditor shall provide to the covered borrower the following information before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit:

(1) A statement of the MAPR applicable to the extension of consumer credit;

(2) Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure; and

(3) A clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or account-opening disclosure (in the case of open-end credit) provided pursuant to paragraph (a)(2) of this section satisfies this requirement.”)

MLA Rules, 32 CFR 232.6(d) (“Methods of delivery

(1) Written disclosures. The creditor shall provide the information required by paragraphs (a)(1) and (3) of this section in writing in a form the covered borrower can keep.

(2) Oral disclosures.

(i) In general. The creditor also shall orally provide the information required by
paragraphs (a)(1) and (3) of this section.

(ii) Methods to provide oral disclosures. A creditor may satisfy the requirement in
paragraph (d)(2)(i) of this section if the creditor provides

(A) The information to the covered borrower in person; or

(B) A toll-free telephone number in order to deliver the oral disclosures to a
  covered borrower when the covered borrower contacts the creditor for this
  purpose.

(iii) Toll-free telephone number on application or disclosure. If applicable, the toll-
free telephone number must be included on –

   (A) A form the creditor directs the consumer to use to apply for the
  transaction or account involving consumer credit; or

   (B) A written disclosure the creditor provides to the covered borrower,
  pursuant to paragraph (d)(1) of this section.”)

Interpretive Rule, Military Lending Act Q&As, 81 Fed. Reg. 58840, 58843 (August 26, 2016) (“13. If a creditor chooses to provide the information that is required to be provided orally by providing a toll-free telephone number, consistent with 32 CFR 232.6(d)(2)(ii)(B), when must the information be available to the borrower? Section 232.6(d)(2) requires a statement of the MAPR and a clear description of the covered borrower’s payment obligation to be provided to the covered borrower orally. Creditors may satisfy this requirement by providing the information to the covered borrower in person or through a toll-free telephone number. . . . Since § 232.6(d)(2) permits creditors to provide oral disclosures by providing a toll-free telephone number, such information must be available from the time the creditor provides the toll-free telephone number. The difficulty of providing this information in a timely way through a toll-free telephone system is mitigated by the Department’s interpretation of mandatory oral disclosures as allowing for a nonnumeric statement of the MAPR and a generic, clear description of the payment obligation. See § 232.6(c) and Question and Answer #12 of these Interpretations. Oral disclosures provided through a toll-free telephone system need only be available under § 232.6(d)(2)(ii)(B) for a duration of time reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.”)

Interpretive Rule, Military Lending Act Q&As, 81 Fed. Reg. 58840, 58843 (August 26, 2016) (“12. How may a creditor orally provide the payment obligation disclosure required under 32 CFR 232.6(a)(3) to meet the requirements of 32 CFR 232.6(d)(2)? . . . an oral recitation of the payment schedule or the account-opening disclosure is not the only way a creditor may comply with § 232.6(a)(3). A creditor may also orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow. For example, a creditor could generally describe how minimum payments are calculated on open-end credit plans issued by the creditor and then refer the covered borrower to the written materials the borrower will receive in connection with opening the plan. Alternatively, a creditor could choose to generally describe borrowers’ obligations to make a monthly, bi-monthly, or weekly payment as the case may be under the borrowers’ agreements.”)

Interpretive Rule, Military Lending Act Q&As, 81 Fed. Reg. 58840, 58843–58844 (August 26, 2016) (“Neither the MLA nor the MLA regulation specifies particular content or format for the requirement of a clear, oral description of the payment obligation. Also, nothing in the MLA or the MLA regulation requires that the clear description of the payment obligation provided in writing must be the same as the oral disclosure, provided that both disclosures are clear and accurate. As explained in the supplementary information to the Department’s July 2015 Final Rule, the Department’s approach has been to interpret the MLA’s oral disclosure requirement in a manner that provides creditors ‘straightforward mechanisms’ that afford ‘latitude to develop the same (or consistent) systems to orally provide the required disclosures—regardless of the particular context . . .’ The requirement of a clear, oral payment obligation disclosure has sufficient breadth that creditors may choose a variety of acceptable oral disclosure compliance strategies. Thus, under the Department’s approach, a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.”)