Founder and Managing Partner
Earlier this year the Department of Defense rescinded its guidance effectively prohibiting the sale of GAP contracts to “covered” military borrowers. This is a victory for service members and their families, who will once again have access to financial products that protect them in the event of a total vehicle loss. This article covers the remaining requirements regarding the Military Lending Act and how dealers should design their compliance.
The DOD’s rescission was the result of over a year’s worth of determined effort by NADA. In 2017, the DOD released guidance interpreting the Military Lending Act that in practical effect meant dealers could not offer GAP contracts to military service members and their families, as defined under the law. This guidance was issued with no input from dealer or lender stakeholders. However, NADA worked with DOD to bring about the rescission, arguing successfully that these products did not violate the Military Lending Act and are a benefit to consumers.
Now compliance with the Military Lending Act returns to its prior position. As a refresher, this applies only to financed sales of vehicles (not leases). We recommend that dealerships do all of the following:
Identify military service members
The MLA defines “Covered borrowers” as anyone who meets one of the following criteria:
- Is on active duty
- Regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or less, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 U.S.C. 101 (d)(6)
- The member’s spouse
- The member’s child defined in 38 USC 101(4), or
- An individual for whom the member provided more than one-half of the individual’s support for 180 days immediately preceding the extension of consumer credit covered by 32 C.F.R. Part 232
In order to determine whether the MLA applies to a service member, you must check each customer’s name against the Defense Manpower Data Center (DMDC). You must check the customer’s name at the same time as you take a credit application in person.
- Use the customer’s name as shown on his or her identification.
- Run the customer’s name through the DMDC.
- Print a copy of the results and maintain it in the deal file.
- Inform F&I whether the MLA applies to the customer.
If the customer does not appear in the DMDC, still inquire as to whether the customer is a spouse of child of an active service member. If the answer is in the affirmative, ask for proof of that fact and make a copy of any documentation provided to establish that the person is an active service member, spouse or child of an active service member. Keep that documentation in the sales file.
Apply MLA to covered service members
- Do NOT offer to structure the deal so that the customer is able to accept cash that is financed in the deal.
- Ensure that the total cost of financing the deal does not exceed a 36% Military Annual Percentage Rate (MAPR). MAPR is calculated using the total APR plus the cost of credit products such as GAP, credit insurance, and the Used Vehicle Contract Cancellation Option Agreement.
- Provide the customer with the following disclosure in both oral AND written format:
Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).
- Document the sale using a Retail Installment Sale Contract that does NOT include an arbitration clause.
If you have questions regarding your compliance with the Military Lending Act, contact Scali Rasmussen today.