Amended Military Lending Act could affect dealers

Amended Military Lending Act could affect dealers

The Department of Defense (DOD) recently amended the Military Lending Act that imposes certain restrictions and requirements on creditors including, potentially, auto dealers when they extend credit to service members and their dependents.

That –potentially” is the question. The changes in the law, which take effect October 3, 2016, excludes from its coverage –any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased.” That exclusion would seem to indicate that the new rules do not apply to auto dealers originating vehicle financing.

But a recent DOD interpretation of a separate exclusion to these requirements has caused some observers to question whether DOD views the motor vehicle exclusion as narrow and applying only to the financing of the vehicle itself, and not to related items that are financed with the vehicle. To date, DOD has been unwilling to meet with NADA to clarify the scope of the exclusion.

Because of this uncertainty, NADA anticipates that some finance sources that take assignment of credit contracts from dealers may communicate with them about this topic soon. So NADA asked lawyers from Covington and Burling to prepare a general analysis of the scope of the motor vehicle financing exclusion. Attorney Andrew Smith explained in his analysis why the amended regulation covers the financing of a motor vehicle plus other related items, so the requirements of the amended regulation should not apply to dealers who engage in such financing.

Smith offered several caveats: Most important, there is no guarantee that courts, administrative agencies or others reviewing the issue will agree with his analysis. Second, finance sources that participate in indirect auto financing may have a different view and so may require dealers to perform or refrain from certain actions that relate to credit contracts dealers assign to them. The analysis by Smith is not intended as legal advice to individual dealers. It is essential, then, for dealers to consult their own counsel for legal advice on whether and to what extent the amended MLA Regulation applies to their individual operations.