Guidance on the Military Lending Act

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Congress passed the Military Lending Act (MLA) in 2006 to provide specific protections to active duty service members and their dependents from perceived predatory lending. The Department of Defense (DOD) interprets the rule, and on December 14, 2017, published new interpretive guidance of the MLA that affects car dealers.

Originally, the MLA only applied to high-cost payday loans, some vehicle title loans, and refund anticipation loans. Dealers could generally avoid complying with the requirements of the MLA. However, the guidance issued at the end of 2017 indicates that vehicle sales to military personnel and their family members that includes a GAP contract could require dealers to comply with the MLA. What should dealers do?

First, dealers should understand what the MLA requires. The MLA applies only to “covered borrowers” who enter into agreements for “consumer credit,” which now includes vehicle loan contracts that include a GAP contract. A covered borrower is a person on active duty, serving as a reservist under certain circumstances, and spouses and certain children. The Defense Manpower Data Center maintains a searchable database of people who are “covered borrowers.”

The MLA provides three basic sets of protections to active-duty service members and their dependents in consumer transactions. The law:

  • Limits the Military Annual Percentage Rate (MAPR) for covered products to 36%, including fees;
  • Requires specific oral and written disclosures; and
  • Prohibits creditors from requiring a service member to submit to arbitration in the event of a dispute.

Each of these provisions poses compliance challenges for motor vehicle dealers.

All dealers should now check the Defense Manpower Data Center to see if a potential purchaser is a covered borrower and maintain a copy of the search result in the deal file. Dealers then have two options for dealing with the change in interpretation of the MLA. The first is to comply with the requirements of the MLA for each “consumer credit” purchase that includes GAP. Please contact us for additional information about how to comply with the specific requirements of the MLA.

The second option is to stop offering GAP contracts to “covered borrowers.” By selecting this option, dealers will largely avoid the requirements of the MLA. However, this approach has some risk. GAP is a popular product, and covered borrowers may perceive refusal to sell such a product as discrimination. Dealers opting for the hybrid approach should carefully consider whether a disclosure is appropriate. Please contact us to discuss the best way to implement this approach.