Dept. of Defense Issues New Interpretation of the Military Lending Act

01.09.18

Vehicle Financing Transactions Including Financial Protection Products (GAP, Credit Life/​Disability, etc.) Subject to Military Lending Act Requirements.

On December 14, 2017, the Department of Defense (“DOD”) issued a new interpretative rule (“rule”) for the Military Lending Act (“MLA”). The new rule interprets the MLA as requiring that creditors comply with disclosure requirements and restrictions on the maximum Military APR that may be charged if a vehicle financing transaction involving active duty military members, spouses, and other dependents (as defined by the MLA and implementing federal regulations) finances a credit-related product or service (GAP, Credit Life/​Accident/​Health/​Disability, etc.) or provides cash out financing. The new rule is effective immediately.

Although many consumer finance companies are familiar with disclosure requirements and restrictions imposed by the MLA; prior to this new DOD rule, automobile dealers and vehicle finance companies were generally considered exempt from compliance with MLA requirements in transacting vehicle finance transactions. The new rule, however, considers credit-related products or services financed as part of the credit transaction or cash out financing, incorporated into a vehicle finance transaction, to trigger requirements of the MLA, when such transactions involve a covered consumer. Thus, automobile dealers and vehicle finance companies who sell credit-related products or services, such as GAP or credit insurance, or provide cash-out financing, are immediately required to comply with MLA disclosure requirements and restrictions when a vehicle financing transaction involves active duty military members, spouses, and other dependents. 

Generally speaking, a dealer must comply with the following MLA requirements after it makes a determination that the consumer is covered under the rule: 

• Ensure the credit transaction does not exceed a Military Annual Percentage Rate of 36%; and 
• Provide MAPR disclosures to the consumer (both written and oral), required Regulation Z disclosures, and a clear description of the payment obligation. 

In addition, in extending credit to a covered borrower, the MLA prohibits the following:

• Required use of allotments to repay credit; 
• Required pre-dispute mandatory arbitration; 
• Required waiver of legal recourse under state or federal law, including the Servicemembers Civil Relief Act; 
• Burdensome legal notice requirements in the case of a dispute or unreasonable notice requirements as a condition for legal action; 
• A prohibition on the prepayment of the credit transaction or the assessment of a prepayment penalty; 
• Rollovers, renewals, repayments, refinances, or consolidations for any credit extended to the covered borrower by the same creditor with the proceeds of the other consumer credit extended by that creditor to the same covered borrower; 
• Using the title of a vehicle as security for the obligation (note that chartered/​licensed banks, savings associations or credit unions are excepted from this restriction, and that this prohibition does not apply when the transaction is expressly intended to finance the purchase of a vehicle and the credit is secured by the vehicle; the recent DOD interpretive rule may impact this latter exception when credit insurance products or cash out financing are components of the transaction); and 
• Use of a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower – for transactions not exceeding the 36% MAPR limitation, this does not prohibit an EFT or a direct deposit of the consumer’s salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law.

Automobile dealers and vehicle finance companies should confirm that their contracts do not contain these restricted provisions.

Trade associations, including the National Automobile Dealers Association (“NADA”), are actively working with regulators and other stakeholders for more clarification on this new rule. In the meantime, NADA is urging dealers to review the new DOD rule and consult legal counsel. The Wisconsin Automobile & Truck Dealers Association (“WATDA”) has issued multiple statements on the new rule, including the statements available at the following links: http://​www​.wat​da​.org/​i​n​d​e​x​.​p​h​p​?​m​o​d​u​l​e​=​c​m​s​&​p​a​g​e=112, http://​www​.wat​da​.org/​M​LA_17. The complete DOD interpretive rule; amendment can be found in the Federal Register at the following link: https://​www​.gpo​.gov/​f​d​s​y​s​/​p​k​g​/​F​R​-2017 – 12-14/pdf/2017 – 26974.pdf. Dealers and vehicle finance companies who offer the subject products and services to the public need to familiarize themselves with this new guidance, including the process and tools for screening for customers’ potential military service (or spouse/​dependent) status through the DOD website or with Credit Reporting Agencies.