DOD Reverses Course on MLA Interpretation

In February, the Department of Defense (DOD) issued a statement regarding its interpretation of
the Military Lending Act (MLA). According to a filing in the Federal Register,

“The Department of Defense (Department) is amending its interpretive rule for the
Military Lending Act (the MLA). The MLA, as implemented by the Department, limits the military annual percentage rate (MAPR) that a creditor may charge to a maximum of 36 percent, requires certain disclosures, and provides other substantive consumer protections on “consumer credit” extended to Service members and their families. The Department is now withdrawing the amended question and answer number 2 (Q&A #2), published in the December 14, 2017 Interpretive Rule, which discussed when credit is extended for the purpose of purchasing a motor vehicle or personal property and the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property.” – federalregister.gov/d/2020-04041

This statement follows a joint petition, filed in January 2018 by the National Automobile Dealers Association (NADA) and the American Financial Services Association (AFSA), requesting the DOD to review the interpretation. When the DOD issued its 2017 interpretation, there was no public notice or opportunity for the NADA and other retail automotive trade associations to comment on the implications.

So what does this mean for your dealership and the F&I department? In essence, the reversal exempts auto loans that are also used to finance GAP from MLA compliance. We are counseling our dealers that they can resume selling GAP to active-duty members of the military and their dependents. However, there are some specific details you should consider.

• If you do not provide cash-out financing, credit life, or credit disability, then your auto loans are not required to be MLA-compliant.
• If you do provide cash-out financing, credit life, or credit disability, then your auto loans are required to be MLA-compliant.

Here are the specific details regarding compliance with the MLA.

MLA Duties and Restrictions:

• Dealers are required to determine if a borrower is covered by the MLA before extending credit. This can be done by either using information obtained from the DOD identity management website for the MLA, or from using a nationwide consumer reporting agency, like Experian. If you use these sites, you should have safe harbor protection.
• For those borrowers covered under the MLA, dealers and lenders must calculate a military annual percentage rate (MAPR). The MAPR takes into account application fees, and other fees not traditionally counted as finance charges into the calculation and is capped at 36 percent.
• Arbitration provisions must be made not applicable to borrowers covered under the MLAR with either an addendum or an alternative retail installment contract.
• Dealers and lenders are required to provide additional written and verbal disclosures that are only pertinent to consumers covered by the MLA.

In addition, we encourage our dealers to seek counsel from their legal team. While the reversal of this interpretation is retroactive to contracts issued on or after October 3, 2016, the flip-flop action could garner attention from enterprising class-action lawyers who see an opportunity for gain.

Even if you are not a dealer located near a military base, or a lender that specializes in military lending, our country’s military are widely dispersed throughout the US. Make sure you are well-versed on these new requirements and are able to best meet the needs of your customer.