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    DEPARTMENT OF DEFENSE MILITARY LENDING ACT INTERPRETATION PROVIDES RISK TO SELLING GAP TO SERVICE MEMBERS AND DEPENDENTS

    12/27/2017

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    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.
    1 Comment

    INDIVIDUAL SUED IN PERSONAL CAPACITY FOR AUTO LENDER VIOLATIONS

    12/13/2017

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    12/13/17 REUTERS LEGAL 01:17:58
    REUTERS LEGAL
    Copyright (c) 2017 Thomson Reuters
    December 13, 2017
    Judge rejects tribal immunity for manager of auto lender
    Dena Aubin
    (Reuters) - A former co-manager of a tribal lender accused of collecting illegally high interest rates cannot escape the lawsuit against him by claiming tribal sovereign immunity, a federal judge in Philadelphia ruled.
    In a decision on Monday, U.S. District Judge Gerald Pappert said Craig Mansfield, former co-manager of Michigan-based Sovereign Lending Solutions, was not protected by an Indian tribe's immunity because he was sued in his individual capacity.
    An auto lending arm of the Lac Vieux Desert Band of Lake Superior Chippewa Indians in Michigan, Sovereign Lending closed its business in 2014.
    Philadelphia resident Daniel Pennachietti sued Mansfield in June, alleging that he was charged triple-digit interest rates on an auto loan he took out in 2013 from the lender. Pennsylvania caps rates at 6 percent for unlicensed lenders, according to Pennachietti's lawsuit.
    The lawsuit alleged that Mansfield ran the day-to-day operations of Sovereign Lending, directed it to collect unlawfully high interest rates, and ordered the repossession of vehicles when the illegal interest was not paid.
    The lawsuit is asking for triple damages under the U.S. Racketeer Influenced and Corrupt Organizations (RICO) Act, which bars the collection of unlawful debt. RICO imposes personal liability on individuals who operate an enterprise that collects unlawful debt, Pennachietti's lawsuit said.
    James Williams, chairman of the Indian tribe, said in an email that the tribe is exploring all options, including an appeal.
    "The tribe will continue to take necessary steps to defend its interests and protect its sovereignty and its current and former employees," he said.
    Robert Salvin, a lawyer for Pennachietti, said Indian tribes "are doing a lot of unlicensed, illegal, usurious lending, using tribal immunity as a shield."
    Pennachietti's complaint said his sports utility vehicle was repossessed by Sovereign Lending in 2014 after he was late on a final balloon payment of $6,696 on a $5,050 loan. Pennachietti said he had already paid over $6,300 and had to pay another $7,000 to get his vehicle returned.
    Mansfield, a Wisconsin resident and member of the tribe, had asked the court to dismiss the complaint in June, asserting that the tribe's immunity extends to tribal employees when they are acting in their official capacity.
    Mansfield said he had no individual liability because he did not act independently, and any employee in his role would have performed his duties in essentially the same way.
    In response, Pennachietti said Mansfield is not entitled to immunity under the recent U.S. Supreme Court decision in Lewis v. Clarke, in which the high court held that tribal immunity does not protect an individual from personal liability arising from the course of tribal employment.
    In Monday's decision, Pappert agreed that tribal immunity does not apply.
    "What matters is not the capacity in which Mansfield acted while employed by Sovereign, but rather the capacity in which he is currently being sued," Pappert said. Because the lawsuit is asking the court to impose only personal liability on Mansfield, he is not entitled to tribal immunity, the judge said.
    The case is Pennachietti v. Mansfield, U.S. District Court, Eastern District of Pennsylvania, No. 17-2582.
    For the plaintiff: Robert Salvin at Philadelphia Debt Clinic and Consumer Law Center
    For the defendant: Joel Frank at Lamb McErlane and Justin Gray at the Rosette law firm
    ---- Index References ----
    Company: JUDGE GROUP INC (THE)
    News Subject: (Judicial Cases & Rulings (1JU36); Legal (1LE33); Liability (1LI55))
    Industry: (Banking (1BA20); Financial Services (1FI37); Loans (1LO12); Retail Banking Services (1RE38))
    Region: (Americas (1AM92); Asia (1AS61); Indian Subcontinent (1IN32); Michigan (1MI45); North America (1NO39); Pennsylvania (1PE71); Southern Asia (1SO52); U.S. Mid-Atlantic Region (1MI18); U.S. Midwest Region (1MI19); USA (1US73))
    Language: EN
    Other Indexing: (Sovereign Lending Solutions) (James Williams; Craig Mansfield; Daniel Pennachietti; Robert Salvin; Gerald Pappert; McErlane; Joel Frank; Justin Gray)
    Keywords: banking; fedlit (N2:USA); (OCC:OLRTXT); (N2:US)Keywords:
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    COMPLIANCE 2017 AND A LOOK AHEAD TO 2018

    12/4/2017

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    ​2017 brought a lot of changes in the compliance landscape and more are likely to come in 2018.  Let's review some of the high and low points of the past year and look ahead.
     
    Perhaps the most important development was the Congress' repeal of the Consumer Financial Protection Bureau's ("CFPB") Arbitration Rule.  The Rule was published by the CFPB in  June and would have prohibited waivers of class action rights in virtually all consumer finance contracts.  Fortunately, the Congress used its authority under the Congressional Review Act to repeal the Arbitration Rule in November and President Trump signed the repeal.  The CFPB's own studies revealed that consumers fare better in arbitration than class actions, the only beneficiaries of which seem to be trial lawyers.
     
    Richard Cordray stepped down as CFPB Director in November 2017. After his attempt to appoint his successor failed in the courts, President Trump appointed Mick Mulveney, the OMB Director and a frequent CFPB critic, to be the Acting Director until a replacement for Cordray is named and confirmed by the Senate. 
     
    Before you get too excited about the coming direction of the CFPB, you should know that the FTC and State Attorneys General took very tough enforcement actions against dealers in 2017 for advertising violations and deceptive trade practices.  They will likely continue to do so in 2018.
     
    FTC Activity in 2017
     
    The FTC assessed a $1.4 million penalty against a 12-store California group for violating a 2014 consent decree relating to unfair and deceptive advertising.  As with similar two time violators, the penalties were harsh and the violations did not match those for which the initial consent decree was issued. 
     
    The FTC's complaint--along with several others it filed in 2017--led with what is becoming its leading charge against dealers which is the failure to disclose terms required by Truth in Lending and the Consumer Leasing Act to qualify misleading headlines in advertisements.  To review once more, if a credit ad discloses payment amount, term of obligations, down payment or finance charges, it must disclose all of those (except for finance charges) plus the APR.  If a lease ad discloses the lease payment or amount of capitalized cost reduction or payment due at lease signing, it must disclose that the transaction is a lease, lease payment amounts, the number of lease payments, the amount due at lease signing (all-in), and whether or not a security deposit is required.  Back-end lease obligations and allowable mileage and excess mileage fees may also be required by federal or state law and should be included as well.  Be careful advertising payment amounts as that is the triggering term that seems to catch dealers in most of the cases
     
    State Attorneys General Activity in 2017
     
    Attorneys General come in two varieties: Democrats and Republicans.  DAGA stands for the Democratic Attorney General Association and its statements on its website tell you their goals:
    “Our Democratic Attorneys General provide crucial checks and balances on a new federal administration that often refuses to follow the rule of law.”
    “Democratic Attorneys General Are The First Line Of Defense Against The New Administration.”
     
    Democratic AGs will maintain many of the policies of the CFPB. For example, California is considering its own disparate impact enforcement.  Pennsylvania has created its own mini-CFPB to help consumers deal with claims against auto dealers and other creditors. 
     
    DAGA members have taken strong actions against dealers in the past few years:
     
    ·         New York: AG Eric Schneiderman has prosecuted and settled with dealers for over $15 million in the past three years for deceptive advertising and aftermarket product selling and has convicted a dealer of felony charges regarding the burial of hazardous waste.
    ·       Massachusetts: The Massachusetts AG entered into a $13 million settlement regarding GAP.
    ·       Washington: The Washington AG sued and settled with a dealer for discriminating against Spanish consumers, misrepresenting finance terms, interest rates, title branding and warranties. The dealer paid $250,000 in its settlement and was forced to provide Spanish translated contracts in the future.
    ·    Delaware and Massachusetts: The Attorneys General of these two states settled with a major financing source for $26 million regarding purchasing retail installment sale contracts from thousands of consumers who could not afford them.  These contracts were all originated by auto dealers.
     
    The corresponding organization to DAGA is the Republican Attorneys General Association or RAGA. RAGA members are generally supportive of the Trump administration. But all Attorneys General are required to discharge their legal responsibilities which include responding to consumer complaints.  Consumer complaints against auto dealers are generally within the top three classes of complaints AGs receive each year.
     
    New Risks to Dealers
    Regulatory action in 2018 could also be manifested in new ways:
     
    Autonomous Vehicles and Franchise Dealers: Autonomous vehicles have been attracting a great deal of attention from software companies like Apple and Google that are not traditionally affiliated with the automobile industry. A number of these companies are attempting to fashion artificial intelligence, which will drive vehicles without the need of a human driver.
     
    It is also rumored that these software companies are quietly lobbying Congress to enact legislation, which would allow them to bypass franchise law and sell these vehicles directly to the public. The FTC has already welcomed this idea. If Congress enacted such a law, it could override state franchise law pursuant to the Commerce Clause of the U.S. Constitution.
     
    An “All In” 36% APR: In November 2016, South Dakota voters approved a referendum which bars licensees from contracting for or receiving greater than a 36% maximum finance charge on financing. The finance charge calculation, as in the Military Lending Act APR calculation (MAPR), is an “all-in” calculation, and would include all interest, fees, and charges, including any ancillary products or services.
     
    A violation of the 36% finance charge cap is deemed void and uncollectable, and the financing source could face a criminal misdemeanor charge as well. Adding products such as GAP, service contracts, and other ancillary products very quickly may increase the interest rate beyond the 36% cap. This means that dealers will have less opportunity to sell ancillary products to their customers. Profit opportunities will be lost and consumers will have fewer options.
     
    Creditor Liability in Underwriting: As the Delaware and Massachusetts case showed, regulators may be targeting creditors for not denying credit to those consumers who will, most likely, default on their retail installment sale contracts or lease contracts.
     
    Dealers should recall that they are creditors by law and share in this potential liability. In other words, dealers and financing sources may be liable for advancing sales when the consumer’s ability to discharge their contractual obligations is limited. The law used for these prosecutions is the familiar unfair and deceptive trade practices act (UDAP), which grants federal and state regulators great leeway and flexibility and can provide significant financial penalties such as the $1.4 million levied against the 12-store California group by the FTC.
     
    ADA-Compliant Websites: Groups of consumer lawyers are filing lawsuits against companies whose websites are not compliant with the Americans with Disabilities Act.  Courts have held that websites are "places of public accommodation"  and despite a lack of regulations from the Department of Justice, websites may have to comply with an industry standard such as the Web Content Accessibility Guidelines (WCAG) 2.0 level AA.  This standard is based on four principles.  Websites should be: (1) perceivable; (2) operable; (3) understandable; and (4) robust for people with disabilities.  Such persons should be able to perceive website content using their available senses and a variety of assistive technologies, understand the content and how to operate the website, and websites should continue to be compatible as technology improves.  Courts have gone both ways on this issue and it will be one to watch for in 2018.
     
    What we saw in 2017 included substantial increases in fines for violations, more aggressive enforcement action by the FTC and Attorneys General, and new issues on the horizon.  Expect more of the same in 2018
     
    _________________
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      Author

      Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com
      Follow us on Twitter @randyh44

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