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Victory for Dealers: Withdrawl of Guidance Means Dealers May Sell GAP to Military Members

We are pleased to report that on February 27, 2020, the U.S. Department of Defense (DOD) withdrew Question and Answer 2 (Q&A 2) from the Interpretive Rule it issued on the Military Lending Act in December 2017.  Withdrawal of Q&A 2 is effectively a reversal of DOD’s prior guidance which had prevented dealers from financing GAP to military members and their dependents. The withdrawal will be effective today, Friday, February 28, 2020 upon its publication in the Federal Register.  Based on this change, dealers should be able to sell GAP, and lenders should be able to take assignment of contracts in which military members and their dependents finance GAP in addition to the vehicle purchase itself. 

In summary, the MLA was enacted in 2006 with the intent to protect members of the military and dependents from predatory lending practices. The Act established new limitations, such as a 36% MAPR, arbitration provisions, and disclosure requirements for transactions involving the extension of “consumer credit” as defined under Regulation Z of the Truth in Lending Act (TILA) to covered borrowers. Dealers and their lenders were generally believed to be exempt from the MLA because TILA specifically excluded from its definition of “consumer credit” any credit extended on the purchase of a motor vehicle that is secured by that vehicle.

However, the December 2017 Q&A 2 indicated that if “credit-related products” are financed, the exclusion did not apply and the transaction was subject to requirements under the MLA. Q&A 2 provided examples of “credit-related products”.  Specifically stating, “For example, a credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception under § 232.3(f)(2)(ii) or (iii).”

This new interpretation had an immediate, negative impact as lenders ceased accepting assignment of retail installment contracts for covered borrowers with GAP included in the amount financed.  While dealers grappled with potential compliance concerns, including possible claims of discrimination by members of the military, those service members found they were unable to protect themselves from the potential financial risk that arises when a vehicle is declared a total loss.

In January 2018, NADA and AFSA jointly petitioned DOD to withdraw Q&A 2. Over the next 25 months, these groups continued to demonstrate to DOD that this interpretation: impermissibly narrowed the scope of the motor vehicle financing exclusion that Congress created when it enacted the MLA; was issued in an uninformed and procedurally-deficient manner; and was harming service members and undermining military readiness.

NADA and AFSA also explained that attempting to comply with the MLA as it relates to credit-related products was not economically feasible because one of the restrictions that applies to non-depository institutions like auto dealers was their inability to take a security interest in the vehicle collateral.  

In explaining its decision to withdraw Q&A 2, DOD stated that it “finds merit in [the security interest] concern and agrees additional analysis is warranted.”  A copy of the DOD’s decision to grant the joint petition can be found HERE.

Withdrawal of this guidance is a victory for dealers and our military customers.   It would not have been possible without the tireless work of NADA, AFSA, and dealers around the country, including many Ohio dealers.  OADA would like to thank those dealers who raised this issue with their members of Congress, both at their dealerships and while traveling to Washington, DC.  OADA also appreciates the leadership of NADA Chairman Rhett Ricart from Ricart Automotive Group on this issue, as well as NADA Directors Michelle Primm from Cascade Auto Group and Kirt Frye from Sunnyside Auto Group. All three were active in securing relief for dealers and our military customers.

We anticipate that dealers will receive communications from lenders regarding how this development will impact their lending policies.  We will continue to monitor activity by the DOD relative to the MLA and its potential impact on our members.  Please contact us with any questions.

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