The Department of Defense (DoD) issued revisions to its interpretations of the Military Lending Act (MLA) in mid-December 2017. Most importantly for installment sales financers, the DoD updated its official “questions and answers” to address installment sales agreements that also include other costs beyond the cost of acquiring the purchase asset. Prior to the revised interpretation, the DoD recognized that personal property and motor vehicle finance transactions were exempt from the MLA. The MLA excepted “any credit transaction that is expressly intended to finance the purchase of a motor vehicle [or] personal property when the credit is secured by the [motor vehicle or] property being purchased.” (Section 232.3(f)(2)).
The DoD clarified that any credit transaction to finance the object itself and any “costs expressly related to that object” is covered by the exception. The DoD provides examples of “costs expressly related” to the purchase of a motor vehicle: (i) purchasing optional leather seats, (ii) purchasing extended warranties, or (iii) financing negative equity from a prior vehicle that was traded to obtain the new vehicle.
However, and important for self-financing sellers, dealers, indirect lenders, banks, credit unions, and finance companies, the DoD notes that the addition of certain “credit-related products” to the credit transaction will remove the transaction from the MLA exemption. . The DoD provides examples of “credit-related products” that fall outside the exemption: (i) Guaranteed Auto Protection (GAP) insurance, (ii) credit insurance, and (iii) cash-out transactions.
Based on these changes, any transactions by a self-financing seller, dealer, indirect lender, bank, credit union, or finance company that finances these credit-related products will need to comply with the MLA. These obligations include: (i) identifying transactions subject to the MLA, (ii) calculating the Military Annual Percentage Rate (MAPR) for the transaction, (iii) providing certain MLA disclosures to the consumer, (iv) establishing a procedure for providing oral disclosures and notifying consumers of the right to receive an oral disclosure, and (v) determining if a consumer if a “covered borrower” that receives the protections of the MLA.
Each self-financing seller, dealer, indirect lender, bank, credit union, and finance company will need to perform its own analysis of whether its products are subject to these new interpretations. Many of the large, national dealer underwriting platforms have begun making changes in their paperwork to account for these new obligations. However, particularly indirect financing sources, may need to address these issues through interim, stop-gap measures through amendments to installment sales contracts.