How Military Lending Act Rule Changes Will Affect Dealers

At the end of 2017, the Department of Defense (DOD) issued a new interpretation of the Military Lending Act Rule (MLAR). If you are unfamiliar with this rule, it contains an exemption for credit, which is expressly extended for the purchase of a motor vehicle or personal property.

When the rule was issued, there was confusion concerning whether the inclusion of an ancillary product within the financing would mean that the extension of credit was no longer expressly for the purchase of the motor vehicle, and therefore the exemption would no longer apply.

As of December 14, 2017 — and retroactive to October 3, 2016 — creditors providing credit-related products and services, like GAP, credit life, credit disability, or cash-out financing, must now comply with a full range of duties and restrictions imposed by the MLAR.

In essence, these ancillary products attached to the purchase of a motor vehicle are no longer exempt.

So, what does this mean for any military contracts you may have in place — or will issue in the future?

History of the Military Lending Act Rule

First, let’s review a bit of history about the Military Lending Act Rule. Congress passed the MLAR in 2006 to protect active duty service members and their dependents from predatory lending. Since 2015, the DOD has amended portions of the final rule to expand the scope of the MLAR to include the majority of closed and open-ended loans. These amendments impacted traditional lenders like banks, savings and loans, credit unions, and credit cards. Now, both auto lenders and dealers will be impacted in the following four ways:

1. Arbitration provisions. All retail installment contracts and consumer protection product contracts need to be updated to either remove arbitration provisions, or make them not applicable for borrowers covered under the MLAR.
2. Identifying covered borrowers. Dealers and auto lenders are required to use any method necessary to determine if a borrower is covered by the MLAR before extending any credit. It provides safe harbor, allowing a creditor to conclusively determine whether a customer is a covered borrower by using information obtained either from the Department of Defense identity management website for the MLA, or a nationwide consumer reporting agency, like Experian. If either of these two methods is used, dealers and lenders cannot be faulted for failing to identify a covered borrower.
3. The 36% MAPR cap. Dealers and auto lenders are prohibited by the MLAR to extend covered credit with a military annual percentage rate (MAPR) greater than 36%. MAPR is the adjusted APR that includes application fees and other fees not calculated as finance charges when calculating the annual percentage rate under the Truth in Lending Act (TILA) and Regulation Z.
4. Disclosures. Dealers and auto lenders are required to provide additional disclosures that are only pertinent to those consumers covered by the MLAR.

How will MLAR impact you?

Unfortunately, the DOD issued its interpretation without prior public notice. NADA and other retail automotive trade associations were left with no opportunity to comment on the implications — or to question components of the ruling. Although industry associations are working with federal agencies and Congress to address these issues, auto dealers and lenders are compelled to operate under this interpretation.

Your first step is to seek counsel from your legal team. It’s likely that it too will be evaluating the interpretation, but you should tackle this issue together. The DOD’s interpretation was retroactive to contracts issued on or after October 3, 2016. This clause places the entire retail automotive industry in the crosshairs of enterprising class-action lawyers. Some legal experts are recommending dealers to pull all contracts from that date to determine if any active duty service members or their dependents are listed.

Also, if there are contracts which include active military and their dependents, work with your legal counsel to comply with the four components identified previously. Other experts recommend updating contracts regarding arbitration provisions, and updating procedures for identifying covered borrowers, calculating MAPR, and providing disclosures going forward.

Their thinking is that as our industry trade associations bring these issues to light for the DOD, it will amend its interpretation.

Even if you are not a dealer located near a military base, or a lender that specializes in military lending, assuming your dealership does not conduct business with any customer covered under the Military Lending Act Rule is a foolish — and potentially costly — mistake. Lastly, moving forward, NADA, GAPA, and state dealer associations are recommending dealers and lenders to stop selling GAP, credit life, credit disability, and cash-out financing to active military members.

It’s likely that we have not heard the end of this story. A ruling designed to protect our valued military members and their dependents could now prohibit them from access to an important financial tool, creating other discrimination concerns.

Steve Roennau is vice president of compliance at EFG Companies. In his role, Steve guides EFG’s clients on compliance procedures at the local, state, and federal levels. An AFIP Senior Certified Professional in Financial Services, Steve has developed numerous training modules and regularly conducts compliance courses internally, at dealerships, OEMs, and industry associations. He is also the host of the monthly Common Sense Compliance podcast, available on iTunes.