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Military Lending Act Guidance: The Gift That Keeps On Giving

Thanks could be in order when the industry gets together for NADA 2018, as the editor hears that a resolution to the Military Lending Act controversy isn’t far off.

March 8, 2018

It’s Feb. 21 and there’s a slight chance that this Military Lending Act (MLA) fiasco might be solved by the time the industry converges on Las Vegas for the industry’s annual get-together on March 22. The fact that’s even a possibility is a testament to the hard and persistent work of the National Automobile Dealers Association (NADA)’s regulatory affairs team.

Welcome to F&I and Showroom’s special NADA convention issue. As you probably noticed, 2018 NADA Chairman Wes Lutz is on the cover. On Page 6, he reflects on the NADA’s work in regards to the new tax law and opens up about how critical it will be on the mobility and autonomous vehicle fronts.

"Talk about the gift that keeps on giving, right? I mean, I know dealers in some parts of the country do very well with credit life, and accident and health, but GAP? That’s a core F&I product no matter where you’re located."

Being that we’re a publication dedicated to the F&I trade, I wanted to reflect on the NADA’s efforts in regards to the interpretive rule the U.S. Department of Defense issued on Dec. 14 under the MLA. To recap, the rule amended three of the “Q&A” format interpretations (and added a new one) it published in August 2016 in response to questions raised about compliance with its July 2015 final rule implementing regulations of the MLA.

The one impacting F&I offices is Q&A No. 2, which states that including credit-protection products like GAP in a credit transaction involving active-duty servicemembers or their dependents would take it outside the scope of the motor vehicle finance statutory exclusion and subject the deal to the MLA’s requirements and restrictions.

After the initial shock of the DOD’s actions wore off, it was believed that it was still possible to include GAP in vehicle finance transactions involving military consumers if dealers, with the help of legal counsel, developed processes addressing the MLA’s 36% cap on the military annual percentage rate and the military-specific disclosures the act also requires. As for the MLA’s arbitration provisions, the thought was that a simple adjustment to GAP contracts was all that was needed.

Of course, none of this addressed the DOD’s decision to make its rule retroactive to Oct. 3, 2016, which is why organizations like the NADA continue to seek a withdrawal of the rule. But that was before Jan. 18, when Hudson Cook attorney Thomas Buiteweg delivered a memo to the association containing a legal analysis of something else the DOD did.

Thanks to my contacts, I was able to get my hands on that analysis. But before I get into it, let me back up for a second.

See, as I wrote on this page in F&I and Showroom’s February issue, the DOD’s stance on credit-protection products is rooted in the Consumer Financial Protection Bureau’s review of the payday lending markets. Bureau examiners found servicemembers were falling into “payday debt traps” to pay off auto loans that included F&I products. When the CFPB expanded its examination to indirect auto finance sources and their debt-collection practices, I’m told it discovered that some lenders weren’t canceling F&I products and taking chargebacks when loans ended up as repossessions.

To keep servicemembers out of those debt traps, the MLA prohibits “any creditor” making a covered loan from using a vehicle title as security. Well, the DOD felt those limitations would deny servicemembers the opportunity to “favorably refinance existing auto loans.” So in July 2015, the DOD carved out an exception for federally chartered banks, savings and loan associations, and credit unions. None of this really mattered to dealers and auto finance sources at the time, as transactions involving the financing of a motor vehicle when the credit is secured by the vehicle was statutorily exempted. But that all changed on Dec. 14.

“When combined with a prohibition against taking a security interest in the vehicle in a consumer credit transaction subject to the MLA, it would be unlawful for a creditor to take a security interest in the motor vehicle being sold in a transaction that finances credit-related ancillary products,” the Hudson Cook memo reads, in part. “In our view, there does not appear to be any practical way to continue to finance credit-related products in a transaction given the DOD’s current guidance and apparent interpretation of its MLA regulations.”

Talk about the gift that keeps on giving, right? I mean, I know dealers in some parts of the country do very well with credit life, and accident and health, but GAP? That’s a core F&I product no matter where you’re located. And that’s why the NADA, along with six other trade groups, are actively engaged in an informal process to get the DOD’s undersecretary of personnel and readiness, Robert Wilkie, to withdraw Q&A No. 2.

Some of my sources say a resolution is weeks away. The more conservative outlook is a single-digit number of months. Whatever the case, just know the NADA’s regulatory affairs team is once again on the frontlines of this critical issue.

Have a great show!

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