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Military Lending Act's December Update More Harmful Than First Thought

February 22, 2018

Robert Wilkie, Under Secretary of Defense for Personnel and Readiness.
Robert Wilkie, Under Secretary of Defense for Personnel and Readiness.

WASHINGTON, D.C. — The impact of the interpretive rule the Department of Defense (DOD) issued in December may be more significant than first thought, a legal analysis obtained by F&I and Showroom has revealed.

Trade organizations representing dealers, finance sources and F&I product providers are now actively engaged in an informal process to get the DOD’s recently confirmed undersecretary of personnel and readiness, Robert Wilkie, to withdraw the portion of the DOD’s rule dealing with the inclusion of credit-protection products in finance transactions involving military consumers and their dependents.

“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.”

“Since the issuance of Q&A 2, a number of dealers and finance companies have stopped offering GAP waiver to servicemembers altogether,” stated the Guaranteed Asset Protection Alliance (GAPA), which represents F&I product providers and finance sources, in a petition letter submitted to Wilkie. “… In turn, those servicemembers and their families could have to contend with the financial and emotional difficulties of securing a new motor vehicle while still paying off an existing loan — a result GAPA believes is contrary to Congress’ intent when it passed the Military Lending Act.

“In light of the confusion and uncertainty Q&A 2 has created among those that offer, administer, and finance voluntary protection products like GAP waiver … we urge the DOD to immediately withdraw Q&A 2.”

Published in the Federal Register on Dec. 14, the DOD’s rule amended three of the “Q&A” format interpretations it issued in August 2016 (and added a new one) in response to questions raised about compliance with its July 2015 final rule implementing regulations of the MLA. One of those interpretations, Q&A No. 2, stated for the first time that including credit-protection products like GAP in a credit transaction involving active-duty servicemembers and 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.

Making matters worse, the GAPA’s letter notes, is the DOD’s interpretation applies to all contracts dating back to Oct. 3, 2016, “calling into question the status of the thousands of GAP waiver policies issued over the last three years and opening the door to liability that could not have been predicted or mitigated.”

The organization’s letter is one of the six petitions submitted by trade groups to Undersecretary Wilkie since mid-January. Other organizations include the National Automobile Dealers Association (NADA), the American Financial Services Association (AFSA), the American Bankers Association, the Consumer Bankers Association, the National Association of Federally-Insured Credit Unions, the Credit Union National Association, and the Defense Credit Union Council.

According to sources close to those discussions, it was the DOD that requested that the trade organizations engage in the informal petition process. Doing so, the DOD told the associations, would allow the DOD to consult with other agencies and get the process moving faster.

The NADA and the AFSA were the first to submit a petition. They did so on Jan. 18, the same day Hudson Cook attorney Thomas Buiteweg delivered a memo containing a legal analysis of the DOD’s actions to the NADA. That memo notes that something else the DOD did back in 2015 makes it “highly unlikely that any dealer or finance source will be willing to originate or purchase” a credit transaction subject to the MLA.

Passed back in 2006, the MLA provides specific protections for active-duty servicemembers and their dependents in consumer credit transactions, including a 36% cap on the military annual percentage rate in covered transactions. It also requires military-specific disclosures and prohibits creditors from requiring arbitration in the event of a dispute, among many other protections.

When the MLA first took effect, by regulation, it only covered three narrow categories of consumer credit, including payday loans, tax refund anticipation products and vehicle title loans, as well as overdraft lines of credit and some installment loans. Credit transactions involving the financing of a motor vehicle or personal property when the credit is secured by the vehicle or property were statutorily exempted.

When the DOD amended its implementing rule in July 2015, the MLA’s protections were expanded to other types of consumer credit, although the motor vehicle finance exclusion remained. The Hudson Cook memo notes that the DOD also addressed a concern it had regarding the MLA’s restrictions on using an auto title as security for an MLA-covered loan. The DOD felt the limitations would prevent servicemembers from taking advantage of auto refinancing offers.

Meant to prevent military consumers from falling into “payday lending traps,” the MLA prohibited “any creditor” making an MLA-covered loan from using a vehicle’s title as security. To address its concerns regarding auto refinance offers, the DOD carved out an exception for federally-chartered banks, savings and loan associations, and credit unions.

Explaining this carve-out, the DOD reasoned as follows: “Upon review of the broad scope of restrictions in 10 U.S.C. 987(e)(5), the Department has determined that if the restriction against using the title of vehicle as security for consumer credit were to apply to any creditor, without limitations, then many covered borrowers undoubtedly would be denied opportunities to favorably refinance existing auto loans, particularly to take advantage of falling interest rates.”

The bank carve-out had no impact on auto finance until the DOD issued “a narrow interpretation of the personal property financing exclusion” shortly before the expanded MLA took effect on Oct. 3, 2016. The interpretation stated that financing items beyond the personal property being financed took the transaction outside the scope of the property exception to the MLA’s requirements, which raised the question of whether the DOD had a similar view of the identically worded motor vehicle financing exclusion.

Without warning, the industry got its answer a year later. On Dec. 14, the DOD said the answer depends on what the credit beyond the purchase price is used to finance. It then listed GAP, credit insurance, and cash-out financing as items that would take a vehicle finance transaction outside the scope of the motor vehicle finance exclusion.  

The response sent the industry into a scramble, with the NADA issuing a memo that advised members to consult with legal counsel to first determine whether to continue offering credit-protection products to military consumers and their dependents. If the decision is “Yes,” the NADA further advised members to consult legal counsel to determine what actions need to be taken to comply with the MLA’s requirements.

An issue that legal analysts later identified was how the DOD’s bank carve-out relating to the taking of vehicle security interests impacted vehicle finance transactions subject to the MLA’s rules and requirements. According to the Hudson Cook memo, the carve-out makes complying with the MLA’s other requirements — including the 36% military annual percentage rate cap, disclosure requirements and arbitration provisions — pointless.

“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, noting that the DOD also has “informally advised that it believes consumers pay more for credit-related ancillary products at the point of vehicle sale and financing than they would were they to purchase such products from insurance companies separately, though they are unable to point to data supporting that view.”

Sources close to the discussions say the DOD’s stance on credit-protection products is rooted in the Consumer Financial Protection Bureaus’ review of the payday lending markets. What the regulator found were servicemembers falling into “payday lending 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, according to sources, it found that some lenders weren’t canceling F&I products and taking chargebacks when loans ended up as repossessions.

“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,” the Hudson Cook memo adds.

On Feb. 12, Wells Fargo became the latest finance source to notify dealers that it would not purchase installment contracts with covered borrowers that include GAP, credit life protection, or accident and health insurance — a move sources say was motivated by the Hudson Cook finding. But that hasn’t stopped F&I training schools like The Academy, mega dealers and even finance sources like Security National Automotive Acceptance Co. from pursuing MLA-compliant processes. The latter claimed to have one in a Feb. 18 blog.

According to sources, the NADA shared the Hudson Cook memo with lawyers representing dealers, urging them to seriously consider the issues raised in the firm’s interpretation — that the DOD intentionally left out dealers from its list of excluded creditors who are not covered by its prohibition against using a vehicle title as security. The challenge is the DOD didn’t follow the normal notice-and-comment process for rulemaking when it issued its interpretive rule in December. Instead, it issued guidance, which isn’t a formally recognized activity. It’s why the DOD requested that industry trade group engage in the informal petition process to get Q&A No. 2 withdrawn, sources say.

“Q&A 2 has the practical effect of eliminating the availability of GAP waiver to servicemembers because it expressly states that inclusion of GAP waiver on retail installment contract causes the contract to fall within the scope of the MLA, which some have interpreted as prohibiting dealers from taking a security interest in a vehicle,” the GAPA’s petition letter reads, in part. “Put simply, under the MLA, as interpreted by Q&A 2, a dealer may not engage in conventional vehicle financing with a servicemember or his family if the servicemember wants to purchase [a] GAP waiver.”


  1. 1. Daren Northup [ February 21, 2018 @ 12:42PM ]

    How do they make such ridiculous rules like this one? GAP has saved many many consumers thousands of dollars in monies owed after insurance settlements. Although this is not a necessary product in every situation, in a lot of cases a consumer is taking a big risk by not opting for GAP coverage.. What they thought was protecting military personnel, has actually done them a disservice. Unless of course the military pays for the money they may owe after an insurance settlement.

  2. 2. Douna Scramaglia [ February 21, 2018 @ 02:48PM ]

    Seems like this would open the door for a discriminatory suit against dealers for not offering all customers all products at time of sale.

  3. 3. Douna Scramaglia [ February 21, 2018 @ 02:49PM ]

    It seems like this would open the door to a discriminatory suit against dealers for not offering all customers all products at the time of purchase.


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