New DOD Interpretation Opens Options for Lenders

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 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.

The Devil is in the Details

Section 232.3(f)(1) defines “consumer credit” as credit extended to an active military member primarily for personal, family, or household purposes that is subject to a finance charge or payable by installments. In other words, financing the purchase of a personal vehicle with a loan. There is a list of exceptions, including an exception for any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.

To qualify for the purchase money exception from the definition of consumer credit, a loan must finance only the acquisition of personal property. Any credit transaction that provides purchase money for secured financing of personal property along with additional “cash-out” financing is not eligible for the exception under § 232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.

GAP is Back

The reversed interpretation by the DOD revolves around the issue of financing that includes Guaranteed Asset Protection (GAP). The previous interpretation required loans that included GAP to comply with MLA restrictions.

What does all of this mean for auto lenders?
The reversal exempts auto loans that are also used to finance GAP from MLA compliance. Lenders can resume selling GAP to active-duty military members and their dependents – with a couple of caveats:

• 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.

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 MLA 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.

Whichever path you choose to take, the regulations remain somewhat murky. Auto lenders should still be cognizant of the rules and seek a legal opinion.