Steve Roennau
Vice President
Compliance
EFG Companies
Sighs of relief turned into sighs of frustration this past December when the Department of Defense (DOD) issued a new interpretation of the Military Lending Act (MLA), potentially resulting in severe implications for all dealers who sell or have sold vehicles to active duty members of the U.S. armed forces and/or their dependents.
It seems that even the holiday season can’t put the brakes on compliance initiatives. As of December 14, 2017, creditors providing credit-related products and services, like GAP, Credit Life, Credit Disability or cash-out financing, must now comply with a full range of duties and restrictions imposed by the MLA. While this interpretation didn’t go into effect until December, it applies to all transactions going back to October 3, 2016.
Auto lenders and dealers are now spending the first month of the new year consulting with their legal counsel to determine whether to continue to offer such products and services to active duty military consumers and their dependents, and if so, what actions must be implemented to comply with MLA requirements.
History of MLA
Congress passed the MLA in 2006 to help protect active duty service members and their dependents from predatory lending. Since 2015, the DOD has been slowly amending the final rule to expand the scope of the MLA to include the majority of closed and open-ended loans.
Most of the products and services offered by traditional lenders like banks, savings and loans, credit unions, and credit cards have been affected by the MLA. Now, both auto lenders and dealers will be impacted in the following four ways:
1. Arbitration Provisions
All retail installment contracts and consumer protection product contracts need to be updated to either remove arbitration provisions or make them not applicable for borrowers covered under the MLA.
2. Identifying Covered Borrowers
Dealers and auto lenders are required to use any method necessary to determine if a borrower is covered by the MLA before extending any credit.
3. 36 Percent MAPR Cap
Dealers and auto lenders are prohibited by the MLA to extend covered credit with a military annual percentage rate (MAPR) greater than 36 percent. MAPR is the adjusted APR that includes application fees and other fees not calculated as finance charges when calculating the annual percentage rate under the Truth in Lending Act (TILA) and Regulation Z.
For example, if an active duty military person wants to finance their vehicle and include GAP, they are now covered under the MLA. If they only finance the vehicle, they are not covered under the MLA. Assuming they want to finance the vehicle and GAP, calculating APR becomes more complicated. Under the MLA, several fees need to be included in that calculation, including application fees, the cost of GAP, Credit Life, and/or Credit Disability, and dealer and/or lender loan acquisition fees, etc. This could potentially make it possible to easily increase the “APR” presented to military consumers, especially if they are subprime, to the 36 percent cap.
4. Disclosures
Dealers and auto lenders are required to provide additional disclosures that are only pertinent to those consumers covered by the MLA.
Effect of DOD Decision on the Industry
If the DOD had implemented their decision for all auto loan transactions going forward, the implications of the decision would be fairly simple. All that would be required is updated contracts regarding arbitration provisions and updated procedures for identifying covered borrowers, calculating MAPR, and providing disclosures. This would be a simple hurdle for the industry.
Unfortunately, the DOD extended the decision to include all contracts going back more than a year to October 3, 2016. This places the entire retail automotive industry in the cross-hairs of enterprising class action lawyers. The majority of auto lenders and dealers had none of the above measures in place. The only institutions who might not be overly affected by this are those credit unions that specialize in military lending. Because of their specialty, they most likely made sure all lending solutions complied with the MLA. Meanwhile, the rest of the industry could undergo a major class action disaster should the DOD decision remain standing as is.
What Now?
Because the DOD issued its interpretation without notice of an opportunity to comment, there was no opportunity for NADA and other retail automotive trade associations to explain how the interpretation could negatively impact dealers, lenders, and military members. While industry associations are working with federal agencies and Congress to address these issues, auto dealers and lenders are still stuck operating under this interpretation.
Current guidance coming out from NADA, GAPA, and state dealer associations is to stop selling GAP, Credit Life, Credit Disability, and cash-out financing to active military members. In addition, lend your voice to their efforts by contacting your state representatives.
With more than 40 years helping dealerships navigate the myriad of local, state and federal regulations, EFG Companies knows how to cultivate a compliant and profitable operation for both auto lenders and retail dealerships. Contact us today to find out how.