The Military Lending Act ("MLA") is a law enacted by Congress in 2006, and amended in 2013, to protect the rights of service members in certain types of financial transactions. As originally crafted, the MLA covered three types of consumer credit: payday loans, auto title loans, and tax refund anticipation loans. That changed in 2013 when the MLA and regulations were broadened to cover consumer credit generally except for mortgages and certain exempt transactions which include purchase money auto financing secured by the vehicle. The MLA final rules and regulations are issued by the Department of Defense ("DOD") but enforced by the Department of Justice, the Federal Trade Commission, and the Consumer Financial Protection Bureau.
Under the revised DOD regulations effective October 3, 2016, the auto finance exemption covered financing of vehicles and vehicle-related products and services. It has been generally understood that credit insurance and GAP relating to the vehicle financing do not bring the transaction outside of the auto financing exemption. However, if non-auto finance-related items were financed in the transaction, such as would be the case, for example, if the customer took a large amount of cash out of the financing, then the transaction would be covered by the MLA.
What the Military Lending Act Requires
If a transaction is subject to the MLA, federal regulations require detailed disclosure requirements, both written and oral, as well as the calculation and disclosure to the covered service member of a "military APR" in addition to the customary Truth in Lending ("TILA") APR. The military APR adds a lot more things into the "finance charge" and hence the APR calculation such as fees, aftermarket products, GAP costs, and credit related insurance premiums. If including these things along with traditional finance charges creates a military APR of over 36%, the transaction is void and prohibited.
Mandatory disclosures under MLA regulations.
In addition to disclosing both the military APR along with the TILA APR, you must disclose in writing "a clear description of the payment obligation." The regulations also give a 110-word model statement essentially describing the military APR. This, or some substantially similar disclosure, must also be given. Additional oral disclosures (which may be made either personally or by using a dedicated toll-free telephone number) are another requirement. If you use the toll-free number, its number must be on the credit application or the written disclosures. In either event, you will need to effectively document your giving the written and oral disclosures in the deal jacket.
If this seems like a difficult process for your everyday sales or f & i manager, you are correct.
It is also difficult to identify who is a "covered borrower" under the MLA to whom the law applies The term is not synonymous with the general definition of “service members” and their dependents under the Service Members Civil Relief Act (e.g., dependents are more broadly defined for purposes of the MLA).
However, there is a “safe harbor” way to determine whether an individual is a MLA covered borrower. The individual can be checked against the DOD’s online database (for new transactions only) at https://mla.dmdc.osd.mil/mla/#/home and then link from there to https://mla.dmdc.osd.mil/mla/#/single-record for entry of one person. Alternatively, a dealer can get the person’s status as an MLA covered borrower from a national consumer reporting agency in connection with their credit report. Check with your credit report provider who may impose an additional charge for this notation but getting the covered borrower status on a credit report seems to be the easier way to go.
Department of Defense Changes to MLA Motor Vehicle Financing Exemption
On December 14, 2017, the DOD issued its second interpretation of the Military Lending Act. Its first interpretation which took effect October 3, 2016 issued revised regulations in response to MLA statutory amendments in 2013. As noted above, it effectively clarified that the exemption from the MLA for purchase money auto financing credit secured by the vehicle generally included within the exemption advances for financing items related to the vehicle which included credit insurance and GAP.
DOD’s second interpretation indicated a transaction was exempt from the MLA “that finances the [vehicle] itself and any costs expressly related to that [vehicle]. . . provided it does not also finance any credit-related product or service.” This means if the auto financing transaction includes GAP or credit insurance, the whole transaction is arguably outside of the exemption and subject to the MLA. The DOD further stated that its second interpretation did not change the original regulations that took effect in October 2016, but merely stated DOD’s "pre-existing interpretations an existing regulation." This puts at risk any vehicle financing transaction beginning October 3, 2016 that financed credit insurance or GAP for an MLA covered borrower but which does not comply with the MLA’s extensive disclosure requirements or fails to disclose the “military APR” complex calculation which is capped at 36%.
MLA Penalties for Non-Compliance
Since financing of credit insurance or GAP now may put a transaction outside of the MLA exclusion for purchase money auto financing, substantial penalties for violating the MLA could apply to non-MLA conforming transactions, both looking back to October 3, 2016 and looking forward. These penalties include federal criminal misdemeanors imposing fines and up to one year in prison for knowing violations; voiding of contracts from inception; civil liability of actual damages or $500 statutory damages recoverable in class actions; punitive damages; costs and attorney’s fees. The MLA expressly forbids and will not enforce arbitration clauses and requires other protections for the MLA covered borrower as well.
Possible Actions in Response to the DOD's December 2017 Interpretation
Until legislative, judicial, or agency clarification can be obtained, it appears dealers have two options. One is to simply not offer credit insurance or GAP to any customer which will avoid the MLA problem totally.
The second alternative is not to offer credit insurance or GAP to MLA covered borrowers. This means you will have to check every customer using one of the "safe harbors" described above (DOD MLA site or a credit report indicating the person's MLA status) before selling them GAP or credit insurance. Do so at the time the consumer submits a credit application or within 30 days earlier if, for example, you are doing a pre-screening mailing. Document your doing so in the deal jacket.
At least 11 states have military anti-discrimination statutes. Each state interprets its law differently. In response to a claim of military discrimination for not selling GAP to MLA covered borrowers, the dealer could argue that it has a legitimate business interest in not doing so. The legitimate business interest would be not wanting to incur the excessive compliance costs imposed by the federal government (principally oral disclosure requirements and calculation of the military APR) to be able to sell these products to MLA covered borrowers. I don't believe this argument--which derives from successful cases under the federal Equal Opportunity Act charging disparate impact discrimination on federally protected classes of people--has been tested under any state's anti-military discrimination act case. Plus each state's law is different. Consult your local attorney or compliance professional on the law in your state to get a sense of whether a "legitimate business interest" is a defense to alleged credit discrimination against protected military members under your state's law.
Summary and Conclusion
There are good arguments to be made that the DOD exceeded its authority in issuing the December 2017 interpretation and trying to make it retroactive. It did not publish proposed regulations or seek comments for this new "interpretation" which sure seems like a regulation. It's attempt to give it retroactive effect is also very dubious. These arguments, and others, will be raised in court cases or before the agency. But you don't want to be the one who has to incur the expense to do that.
I think the approach of offering GAP and credit insurance to every customer except a safe harbor-checked MLA covered borrower is the best business approach, subject to a state anti-military lending discrimination statute that might suggest otherwise. The legitimate business defense in not incurring the compliance cost and burden of MLA transactions seems reasonable to me.
Also, lobby your Congress people and state legislators on this one. Dealerships near large military bases stand to lose a lot of revenue if the DOD's interpretation is legitimized. I know NADA will work this issue hard in Washington and hopefully a more rational interpretation that GAP and credit insurance on a vehicle financing transaction do not risk the auto financing MLA exemption will prevail.
Under the revised DOD regulations effective October 3, 2016, the auto finance exemption covered financing of vehicles and vehicle-related products and services. It has been generally understood that credit insurance and GAP relating to the vehicle financing do not bring the transaction outside of the auto financing exemption. However, if non-auto finance-related items were financed in the transaction, such as would be the case, for example, if the customer took a large amount of cash out of the financing, then the transaction would be covered by the MLA.
What the Military Lending Act Requires
If a transaction is subject to the MLA, federal regulations require detailed disclosure requirements, both written and oral, as well as the calculation and disclosure to the covered service member of a "military APR" in addition to the customary Truth in Lending ("TILA") APR. The military APR adds a lot more things into the "finance charge" and hence the APR calculation such as fees, aftermarket products, GAP costs, and credit related insurance premiums. If including these things along with traditional finance charges creates a military APR of over 36%, the transaction is void and prohibited.
Mandatory disclosures under MLA regulations.
In addition to disclosing both the military APR along with the TILA APR, you must disclose in writing "a clear description of the payment obligation." The regulations also give a 110-word model statement essentially describing the military APR. This, or some substantially similar disclosure, must also be given. Additional oral disclosures (which may be made either personally or by using a dedicated toll-free telephone number) are another requirement. If you use the toll-free number, its number must be on the credit application or the written disclosures. In either event, you will need to effectively document your giving the written and oral disclosures in the deal jacket.
If this seems like a difficult process for your everyday sales or f & i manager, you are correct.
It is also difficult to identify who is a "covered borrower" under the MLA to whom the law applies The term is not synonymous with the general definition of “service members” and their dependents under the Service Members Civil Relief Act (e.g., dependents are more broadly defined for purposes of the MLA).
However, there is a “safe harbor” way to determine whether an individual is a MLA covered borrower. The individual can be checked against the DOD’s online database (for new transactions only) at https://mla.dmdc.osd.mil/mla/#/home and then link from there to https://mla.dmdc.osd.mil/mla/#/single-record for entry of one person. Alternatively, a dealer can get the person’s status as an MLA covered borrower from a national consumer reporting agency in connection with their credit report. Check with your credit report provider who may impose an additional charge for this notation but getting the covered borrower status on a credit report seems to be the easier way to go.
Department of Defense Changes to MLA Motor Vehicle Financing Exemption
On December 14, 2017, the DOD issued its second interpretation of the Military Lending Act. Its first interpretation which took effect October 3, 2016 issued revised regulations in response to MLA statutory amendments in 2013. As noted above, it effectively clarified that the exemption from the MLA for purchase money auto financing credit secured by the vehicle generally included within the exemption advances for financing items related to the vehicle which included credit insurance and GAP.
DOD’s second interpretation indicated a transaction was exempt from the MLA “that finances the [vehicle] itself and any costs expressly related to that [vehicle]. . . provided it does not also finance any credit-related product or service.” This means if the auto financing transaction includes GAP or credit insurance, the whole transaction is arguably outside of the exemption and subject to the MLA. The DOD further stated that its second interpretation did not change the original regulations that took effect in October 2016, but merely stated DOD’s "pre-existing interpretations an existing regulation." This puts at risk any vehicle financing transaction beginning October 3, 2016 that financed credit insurance or GAP for an MLA covered borrower but which does not comply with the MLA’s extensive disclosure requirements or fails to disclose the “military APR” complex calculation which is capped at 36%.
MLA Penalties for Non-Compliance
Since financing of credit insurance or GAP now may put a transaction outside of the MLA exclusion for purchase money auto financing, substantial penalties for violating the MLA could apply to non-MLA conforming transactions, both looking back to October 3, 2016 and looking forward. These penalties include federal criminal misdemeanors imposing fines and up to one year in prison for knowing violations; voiding of contracts from inception; civil liability of actual damages or $500 statutory damages recoverable in class actions; punitive damages; costs and attorney’s fees. The MLA expressly forbids and will not enforce arbitration clauses and requires other protections for the MLA covered borrower as well.
Possible Actions in Response to the DOD's December 2017 Interpretation
Until legislative, judicial, or agency clarification can be obtained, it appears dealers have two options. One is to simply not offer credit insurance or GAP to any customer which will avoid the MLA problem totally.
The second alternative is not to offer credit insurance or GAP to MLA covered borrowers. This means you will have to check every customer using one of the "safe harbors" described above (DOD MLA site or a credit report indicating the person's MLA status) before selling them GAP or credit insurance. Do so at the time the consumer submits a credit application or within 30 days earlier if, for example, you are doing a pre-screening mailing. Document your doing so in the deal jacket.
At least 11 states have military anti-discrimination statutes. Each state interprets its law differently. In response to a claim of military discrimination for not selling GAP to MLA covered borrowers, the dealer could argue that it has a legitimate business interest in not doing so. The legitimate business interest would be not wanting to incur the excessive compliance costs imposed by the federal government (principally oral disclosure requirements and calculation of the military APR) to be able to sell these products to MLA covered borrowers. I don't believe this argument--which derives from successful cases under the federal Equal Opportunity Act charging disparate impact discrimination on federally protected classes of people--has been tested under any state's anti-military discrimination act case. Plus each state's law is different. Consult your local attorney or compliance professional on the law in your state to get a sense of whether a "legitimate business interest" is a defense to alleged credit discrimination against protected military members under your state's law.
Summary and Conclusion
There are good arguments to be made that the DOD exceeded its authority in issuing the December 2017 interpretation and trying to make it retroactive. It did not publish proposed regulations or seek comments for this new "interpretation" which sure seems like a regulation. It's attempt to give it retroactive effect is also very dubious. These arguments, and others, will be raised in court cases or before the agency. But you don't want to be the one who has to incur the expense to do that.
I think the approach of offering GAP and credit insurance to every customer except a safe harbor-checked MLA covered borrower is the best business approach, subject to a state anti-military lending discrimination statute that might suggest otherwise. The legitimate business defense in not incurring the compliance cost and burden of MLA transactions seems reasonable to me.
Also, lobby your Congress people and state legislators on this one. Dealerships near large military bases stand to lose a lot of revenue if the DOD's interpretation is legitimized. I know NADA will work this issue hard in Washington and hopefully a more rational interpretation that GAP and credit insurance on a vehicle financing transaction do not risk the auto financing MLA exemption will prevail.
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