A new interpretation of the Military Lending Act (MLA) by the U.S. Department of Defense (DOD) should cause dealers to question whether they will sell GAP protection and credit insurance to active duty military personnel and their dependents. The December 14 interpretation of the 2015 regulations also raises the potential of liability for dealers on vehicles sold since October, 2016 to members of the military.
The MLA, written to protect members of the military from predatory lending, limited the military APR (MAPR) of credit to 36 percent. That definition of MAPR is different from the one under Regulation Z of the Truth in Lending Act because it includes all cost elements associated with the extension of credit. But vehicle sales were exempt under the MLA.
Then the December 2017 interpretation said that financing credit-related costs disqualified the transaction from the financed vehicle exceptions. Products like GAP insurance and credit insurance are not exempt and are now regulated by the MLA.
Compliance with MLA regulations and the penalties for failing to do so are draconian. Dealers should consider methods of vehicle financing to military members that avoid MLA requirements. A dealer who decides to stop selling GAP and credit insurance products to active duty service members and dependents must have a procedure for identifying those individuals that is used in every transaction.
DOD offers two ways dealers can check whether a customer is a military member:
- Put the consumer’s last name, date of birth and Social Security number into a government website at https://mla.dmdc.osd.mil/mla/#/home, or
- Verify whether the credit report from a consumer reporting agency contains a “statement, code, or similar indicator” describing military status.
It is not clear from DOD’s interpretation whether a dealer can sell GAP and credit insurance products separately if they are not financed. The MLA applies to consumer credit, so leasing is probably not covered.
If a dealership wants to take action, senior management should decide whether: (1) to stop offering GAP products and credit insurance to any customers; or (2) to stop selling those products to active military and their dependents. Option (1) requires no further action. Option (2) requires management to put processes in place.
There is no apparent remedy at this point for deals completed since October 3, 2016.
Thanks to attorney and WANADA Kindred-line member Michael Charapp, Charapp & Weiss, LLP, for offering this information. It is intended for education only and does not constitute legal advice. For legal advice, dealers are advised to consult their attorney.
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