On December 14, 2017, the Department of Defense (DOD) issued an interpretation of its regulations on the Military Lending Act (MLA), stating that vehicle financing with active duty military personnel and their dependents that includes GAP protection and/or credit insurance requires compliance with the MLA.
The DOD considers the interpretation effective as of October 3, 2016.
NADA is working with multiple federal agencies and members of Congress to address the implications this interpretation has on dealers. Dealers should consult with their legal counsel regarding military lending. Below is a summary of important provisions of the MLA and how the recent interpretation will impact dealers.
What is the Military Lending Act?
The MLA was enacted to protect members of the military on active duty and their dependents from predatory lending practices. It limited the military annual percentage rate (MAPR) of credit to no more than 36%. The definition of the MAPR differs from that under Regulation Z of the Truth in Lending Act because it “includes all cost elements associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary products sold with an extension of credit to a service member or the service member’s dependent, as applicable, and any other charge or premium with respect to the extension of consumer credit.” The MLA requires oral and written disclosures about the MAPR in addition to those under the Truth in Lending Act and a clear description of the payment obligations of the member or dependent.
Who is a “covered borrower”?
A covered borrower is a “covered member” or a “dependent of a ‘covered member’”. A covered member is anyone on Active Duty (as long as the period of Active Duty is not specified as 30 days or fewer), and Active Guard and Reserve Duty. The MLA also applies to dependents. A dependent is the spouse, children meeting the requirements of a dependent, and dependent parents or parents-in-law.
How does the MLA affect dealerships?
When the MLA was passed, it seemed clear that extending credit for motor vehicle sales was not intended to be included under its coverage. On July 22, 2015, the DOD published regulations on the MLA in which the exemption of financed vehicles did not seem to be an issue. Later, DOD provided a narrow interpretation of the personal property financing exclusion and stated that “cash out” financing in the purchase of other personal property would not be exempt from the MLA. The motor vehicle financing industry sought to clarify the scope of the vehicle financing exclusion to the MLA requirements. DOD responded on December 14, 2017, by issuing a second interpretation stating that the regulations issued in 2015 meant that “financing credit related costs will disqualify the transaction from the [financed vehicle] exceptions.”
The recent interpretation identified product-related items that could be financed with the vehicle and still fall within the vehicle financing exclusion to the MLA requirements and listed examples such as optional leather seats, extended warranty for service, negative trade equity, documentary fees. However, DOD said that when a “credit related product or service” is included, the financing is not eligible for the exemption. It included examples of Guaranteed Auto Protection (GAP) insurance or a credit insurance premiums. If a dealership sells a vehicle financed by a covered service member or dependent and the purchase includes financing GAP or credit insurance, the dealership must comply with the MLA.
What does the MLA require?
The MLA has several stringent requirements that could directly affect a dealership. For example, under MLA the creditor must disclose not only the APR, but also the MAPR. The MAPR cannot exceed 36% and must include as a part of the finance charge any fees for GAP, credit insurance, etc. Because MAPR includes additional items from the APR, it should be calculated and disclosed separately.
In addition to the MAPR, the creditor must make all required Regulation Z disclosures and must provide a clear description of the payment obligation (i.e. a payment schedule). In connection with the MAPR, a creditor must also make a detailed disclosure at or before the credit transaction. The MAPR disclosures and the repayment obligations must be made both in writing and orally. To satisfy the oral requirement, the creditor can establish a toll-free telephone number. The telephone number must be provided on the credit application, and available prior to completing the credit sale.
The MLA also prohibits the following practices relevant to a dealership:
· The same creditor and same borrower rolling over or refinancing consumer credit;
· Restricting or waiving the covered borrower’s legal rights under any State or Federal law (i.e., participating as members of a class action);
· Requiring the covered borrower to sign an arbitration agreement.
What are the penalties for violating MLA?
Any contract that violates MLA is void from inception. Penalties are severe. There are criminal penalties for violating MLA and any person injured by a violation of the MLA can bring a civil action for actual damages, punitive damages and attorney’s fees.
What should dealers do now?
There is a concern about deals arguably covered by MLA completed since October 3, 2016. There is no apparent remedy at this time for those deals unless national dealer advocates can determine a solution. Dealers could potentially face liability for these deals.
For future deals, dealers can:
· Sell GAP products and credit insurance products to service members and their dependents as part of the amount financed and comply with all the requirements of the MLA. The dealership should check with its DMS provider to be sure that all necessary disclosures can be provided. This includes proper disclosures of the MAPR, and a “savings clause” in the contract or arbitration agreement that creates an exception where prohibited by applicable law.
· Stop the sale of all GAP and credit insurance products to all customers.
· Stop the sale of GAP and credit insurance products to active members and their dependents in the sale of financed vehicles. A dealer that decides to cease selling GAP and credit insurance products to active duty service members and their dependents must have a procedure for identifying those individuals to be used in every transaction. DOD provides two safe harbors for determining whether a consumer is a covered borrower: By putting the last name, date of birth, and social security number into a government website at: https://mla.dmdc.osd.mil/ mla/#/home (note: this website may not be used after a transaction has been entered to determine if a consumer had been a covered borrower as of the date of that transaction); or
· By verifying whether the credit report from a consumer reporting agency contains a “statement, code, or similar indicator” describing that status.
Under DOD regulations, a determination made by one or both methods shall be deemed conclusive as long as a timely record of the activity is maintained. It is recommended that the records be kept at least five years.
Can the dealership sell GAP products separately if they are not financed?
It is not clear from the DOD regulations or interpretations that sales of these products coming from a down payment during a single transaction would separate the sale enough to be exempt from MLA. There is not sufficient guidance to inform what sales by a method other than inclusion in the credit obligation may be permitted when the potential penalties for noncompliance are so severe.
What about leases?
The MLA applies to the extension of consumer credit, so leasing is probably not covered. PAA will continue to monitor this issue and assist where needed as NADA explores solutions for dealer members. Dealers are encouraged to immediately review the new DOD interpretation of federal law and consult with legal counsel. The interpretation can be accessed online at: https://www.gpo.gov/fdsys/pkg/FR-2017-12-14/pdf/2017-26974.pdf.
Courtesy of PAA Bulletin No 1 • January 5, 2018