Lenders that make loans to service members should pay careful attention to the latest developments in this area.
What happened
Back in 2007, Congress first passed the federal Military Lending Act (MLA) to address alleged predatory lending practices directed toward members of the military and their families. The original law was largely limited to certain types of short-term lending. But as a result of legislation in 2013, the Department of Defense (DoD), in July 2015, promulgated rules that greatly expanded the MLA to include myriad forms of consumer credit, including (for the first time) credit cards. Noncompliance with the MLA regulations could result in draconian remedies. (For a closer look at the MLA and a related statute, the Servicemembers Civil Relief Act, see the Military Lending Act chapter in PLI’s Consumer Financial Services Answer Book, edited by the author of this update.)
In the MLA interpretative rules, as amended in December 2017, the DoD addressed the MLA rule’s exemptions for credit transactions where intended to finance motor vehicle or personal property purchases when such purchases are used as collateral. The question posed was whether credit in such circumstances “fall[s] within the exception to ‘consumer credit’ under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property.” DoD answered that the “answer will depend on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance. Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.” As an example, DoD cited specifically to gap insurance, a form of auto insurance that protects against further liabilities where the recovery received for the total loss of a vehicle is insufficient to cover amounts owed under a lease or financing.
In response to this guidance, several trade groups (including the American Bankers Assn., the American Financial Services Assn., the National Automotive Dealers Assn. and three groups that represent military-focused credit unions) have written to the DoD, asking it to rescind or withdraw that guidance. These groups argue that failing to exempt such transactions would prevent MLA-covered borrowers from access to this important form of insurance. In the meantime, auto dealers have largely halted gap insurance sales to covered MLA borrowers, leaving these groups largely unprotected from total collision liabilities early in the lease or finance term.
Now, a prominent auto blog suggests that the DoD may be changing its tune. In a March 28, 2018, post, Finance & Insurance beat writer Hannah Lutz suggests that the DoD is reconsidering the interpretive guidance. Lutz reports that “word has spread across the finance industry that the Defense Department will withdraw the interpretation in May.” This would be an important development for covered lenders and their affected borrowers.
Why it matters
If your company or MLA-covered clients have stopped selling gap insurance to borrowers subject to the MLA, stay tuned. If these same entities are selling it now, DoD current guidance makes those sales highly problematic. Manatt’s consumer finance team is advising clients in this area and is available to assist.