While the nation prepared for the holiday season this past December, the Department of Defense (DOD) issued a new interpretation of the Military Lending Act (MLA) resulting in potentially severe implications for automobile dealers offering financing to active military service members.
As of December 17, 2017, dealers and creditors providing credit-related products and services such as GAP coverage, credit life insurance, cash-out financing, or credit disability to active members of the military or their dependents must now comply with an extensive list of duties and restrictions imposed by the MLA. Even more challenging, although this new interpretation of the MLA just came out in December, it applies to sales made by auto dealers going back to October 2016.
The DOD’s new interpretation of the MLA expands MLA coverage, stating “financing costs related to the object securing the credit will not disqualify the transaction from exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.” Credit-related costs includes things such as GAP, credit insurance, and cash-out financing.
So what should you as a dealer do now?
First, determine if your customers are active members of the military or are either the spouse or child of military service members prior to offering financing products for sale.
If customers are covered by the MLA, there are two options for compliance moving forward. If you decide to offer them credit-related products, then any and all arbitration provisions must be removed from the agreement. In addition, specific disclosures required by the MLA must be made orally and in writing to the customer, and the MLA’s 36 percent military annual percentage rate (MAPR) cap must be imposed on the transaction.
The other option, and current guidance coming from the National Automobile Dealers Association (NADA) and state dealer associations, is to simply stop offering credit financing products such as GAP, credit life insurance, credit disability, and cash-out financing to customers covered by the MLA.
NADA and other associations are currently reaching out to the DOD to express concerns over potential liability issues for dealers, especially since this new interpretation covers purchasing agreements that were previously made over the last year. In the meantime, dealers should seek experienced legal counsel to help them decide which option for compliance with this new interpretation of the MLA is best for their individual business.
* Adam Steele contributed to this post.