A new interpretation of the Military Lending Act ("MLA") is causing a lot of challenges for Louisiana dealers in particular because the Louisiana Motor Vehicle Sales Finance Act mandates that the seller of a motor vehicle shall offer GAP to all of its customers.
The MLA, originally enacted in 2006, was intended to protect active military service members and their dependents ("Covered Borrowers") from a variety of lending practices, i.e., prepayment penalties, mandatory arbitration clauses, excessive interest rates, etc. Covered Borrowers include active military, covered member's spouse and children, and individuals for whom the covered member provided more than half of their income. The Act is implemented by the Department of Defense ("DOD"). The MLA calls for additional written and oral disclosures, methods of calculating and disclosing the Military Annual Percentage Rate (MAPR), to name a few. The MLA provides a motor vehicle financing exception, as long as the transaction is expressly intended to finance the purchase of a motor vehicle and the loan is secured by that motor vehicle. Prior to December 14, 2017, all dealers relied on the motor vehicle exception to the MLA when selling a motor vehicle, as well as any and all F&I products associated with the purchase of a motor vehicle, including GAP.
However, that all changed on December 14, 2017, when the DOD issued a new interpretation of the motor vehicle financing exception, one that focuses on whether the exception applies when the extension of credit is for more than just the purchase of the vehicle itself. The key seems to be whether the financing cost relates directly to the object being financed (in which case, the exception will apply), or whether the financing at issue relates instead to financing credit-related costs (in which case, the exception will not apply).
As for negative equity, the NADA is of the opinion that negative equity is sufficiently connected to the vehicle being financed to qualify for the exception. This opinion is in line with what the DOD stated in its new interpretive regulation. There is little guidance on this distinction, but the NADA has provided some practical examples. Optional leather seats or extended warranties for service would qualify for the exception. These products and services are linked directly to the vehicle being purchased and financed. GAP, cash-out financing, and credit insurance are more related to the cost of credit, as opposed to being related to the object being financed, and are, therefore, outside of the motor vehicle financing exception to MLA requirements.
How does this new interpretation affect your dealership? First, you can identify whether your customer is a Covered Borrower by searching the DOD website link or using the information provided in a customer's credit report from any of the three credit reporting agencies. Once you have confirmed that your customer is indeed a Covered Borrower, it is up to you to decide whether the cost to be financed is covered by the motor vehicle financing exception, or is outside of the exception. For example, a GAP policy cannot be financed with the purchase transaction without subjecting the otherwise excluded transaction to all of the fairly onerous requirements, limitations, and disclosures associated with the MLA. Additionally, an attempt to finance GAP or other ancillary product in a separate, unsecured loan or to sell for cash may be deemed to be an attempt to avoid the MLA rule. Some pundits, however, are taking the view that the DOD's interpretation only applies to those things that are financed. The theory is that, if the GAP product were sold in a separate cash transaction, it would not be financed and thus, it would not trigger the MLA. The separate sale of GAP in a cash transaction is not a fool proof plan because the GAP transaction is tied to the financed purchase transaction, and the cash sale maneuver could be seen as an intentional attempt to circumvent the MLA. On the other hand, dealers in Louisiana are required to offer GAP to all of their customers, so dealers cannot just simply refuse to offer GAP to Covered Borrowers under the MLA to avoid the problem. The separate cash transaction is the preferable, but not necessarily bulletproof, approach given the irreconcilable conflict between our law and the DOD interpretation of the MLA.
The Act has some teeth in the form of civil penalties starting at $500 per violation, with exposure for additional punitive damages, attorney's fees and costs. An offender can also be charged with a misdemeanor for a knowing violation.
Several organizations, including the NADA, are working on this issue, trying to educate the DOD on the arguably unintended consequences of its recent interpretation of the motor vehicle financing exception to the MLA. Things look promising on that front, but no one can predict how long a fix could take. We will certainly keep you posted.