Follow-Up Regarding New Military Lending Act Interpretive Rule

Paul R. Norman | 01.15.18

Auto Dealers and Vehicle Finance Companies Must Perform MLA Covered Borrower Checks if They Sell Financial Protection Products (GAP, Credit Life/​Disability, etc.) or Provide Cash Out Financing to Any Consumers.

Following up on our January 9, 2018, post on the Department of Defense (“DOD”) new interpretative rule (“ DOD rule”) for the Military Lending Act (“MLA”), we want to stress to auto dealerships and vehicle finance companies that this new DOD rule impacts all firms that sell credit insurance or other financial protection products (“Covered Products”), or provide cash out financing, in connection with any vehicle finance transactions. For these transactions, a Covered Borrower check MUST always be performed.

Customers may not realize that they are considered Covered Borrowers under the MLA. The MLA disclosure requirements and restrictions, however, apply to vehicle financing transactions involving all military service members and dependents covered by the MLA, referred to as ​“Covered Borrowers,” regardless whether the customer identifies themselves as such.

The MLA provides a safe harbor from liability when a Covered Borrower determination is made using either of the following methods:

• Verifying the status of a consumer by using information relating to that consumer, if any, obtained directly or indirectly from the DoD’s database (located at https://​mla​.dmdc​.osd​.mil/). Searches require entry of the consumer’s last name, date of birth, and Social Security number; or 
• Verifying the status of a consumer by using a statement, code, or similar indicator describing that status, if any, contained in a consumer report obtained from a consumer reporting agency (“CRA”) that compiles and maintains files on consumers on a nationwide basis, or a reseller of such consumer reports. Note that the CRA must be a nationwide agency or a reseller of reports from such an agency; many specialty CRAs may not qualify for safe harbor protection under this method. 

Especially in the context of this new DOD rule, it is important to note that MLA regulations prohibit historic lookbacks. After a consumer has entered into a transaction or established an account with a dealer or vehicle finance company, such creditors (including assignees) may not, directly or indirectly, obtain any information from the DoD database to determine whether a consumer had been a Covered Borrower as of the date of a transaction or the date an account was established.

The safe harbor implementing regulation is found at 32 CFR 232.5.

Dealers or vehicle finance companies that identify a Covered Borrower in conducting sales noted above should consult competent attorneys to determine how best to proceed. More information on this new DOD rule can be found in our earlier post.

Unresolved Issues

There remain important unanswered questions regarding the impact the new DOD rule has on financing Covered Borrowers that NADA and other consumer finance groups are trying to resolve. First and foremost is whether the fact that perfecting a security interest in the purchased vehicle by recording the secured party’s name on the vehicle title violates the MLA when a Covered Product is financed, or cash-out financing is provided, as part of the credit sale of a vehicle to a Covered Borrower. We do not believe that should be the case, but pending further guidance from DOD, dealers who sell Covered Products or provide cash-out financing to Covered Borrowers as part of the credit sale of a vehicle and take a security interest in the vehicle, risk the credit contract being declared void, and penalties, even where they assign the credit contract and security interest to a third party lender. Once this question is resolved, we will know whether it is possible for dealers to legally sell Covered Products or provide cash-out financing to Covered Borrowers on credit secured by the purchased vehicle as long as the necessary disclosures are given and restrictions observed. 

Another open question is whether a dealer may sell a Covered Product to a Covered Borrower in a separate cash transaction entered into at or around the same time of a related credit sale of the vehicle without triggering application of the DOD rule. Strictly read, the rule applies only to credit sales of Covered Products to Covered Borrowers, but, again, the position that DOD or the courts may take on this issue is presently unclear. 

We are hoping that answers to these and other important questions can be obtained in the near future so that our dealer clients will know how to proceed. Stay tuned for further developments.