With the enactment of the CCPA, among other things, 2020 has started off as a bit of a headache for dealers. However, we finally have some good news to share with you. Effective February 28, 2020, the Department of Defense (DOD) issued, in perhaps what can be characterized as a commonsensical and positive decision for dealers and lenders alike, an amendment to its Interpretive Rule for the Military Lending Act (MLA). This amendment repealed the previous guidance from 2017 concerning Guaranteed Asset Protection (GAP) and credit-related products. What does this mean for you? In short, you can now sell GAP to Covered Borrowers (i.e., active duty military or their dependents) and you no longer have to run your “MLA checks” before offering GAP to your customers. Let’s take a look at the long journey of how we finally got here.
Background and the 2017 DOD Revised Interpretation of MLA
Back on December 14, 2017, the DOD issued an amended interpretation of the MLA that took the industry by surprise. In issuing a revised answer to number 2 of the Q&A (Q&A #2) of the interpretative rule to the MLA, the DOD stated that:
“[A] credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the [exemption].” (Federal Register, Vol. 82, No. 239, page 58740, December 14, 2017; emphasis added.)
For all you legal interpretation historians out there, recall that before the issuance of this interpretation, it was believed that motor vehicle retail installment sales were exempt from the MLA. This exemption can be found at 10 USC § 987(i)(6), and states:
“The term ‘consumer credit’… does not include… loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.”
However, with the issuance of the December 14, 2017, revised interpretation, it appeared that selling GAP or other credit-related products to Covered Borrowers took dealers out of this exemption. Accordingly, our guidance to dealers at that time was not to offer for sale GAP or credit-related products to those Covered Borrowers.
The Fight for Change
On January 18, 2018, National Automobile Dealers Association (NADA) and the American Financial Services Association (AFSA) jointly petitioned the DOD to withdraw its revised interpretation in Q&A #2, arguing that it narrowed the scope of the codified motor vehicle financing exemption and was harming service members and undermining military readiness.
Over the next two years, NADA and AFSA attempted to show the DOD that the effect of the revised interpretation was to prevent service members from being provided the opportunity to purchase GAP, leaving them, and their families, potentially exposed to large and unnecessary financial risk in the event their vehicle suffered a total loss. This would harm Covered Borrowers more than help, which ran contrary to the intention of the MLA in the first place.
2020 DOD Amendment to Interpretation of MLA
The years of hard work paid off, and effective February 28, 2020, the DOD officially retracted the 2017 revised answer to Q&A #2. In withdrawing this amended question and answer, the DOD is reverting to the original Q&A #2 published in the August 26, 2016, Interpretive Rule. You can read the full amendment here.
So, what does this mean for dealers? Dealers can now (once again) offer GAP and other credit-related products to active military members and their dependents with relative impunity. This also means that dealers no longer need to perform an “MLA check” to confirm whether the customer is active military or a dependent of an active military member (assuming that dealers have no contractual obligation to do so with their lenders).
However, as we in the dealer world know, lenders are sometimes notoriously slow in updating their policies. Therefore, we conservatively advise that dealers reach out to their lenders to confirm that they are now accepting contracts with GAP sold to active military members and their dependents before starting to offer GAP to those Covered Borrowers. We have already heard of a few lenders sending letters to dealers advising them of the change in policy, and so we are cautiously optimistic that most lenders are already in the process of revising policies related to selling GAP to military members.
Remember, the DOD’s revised interpretation was made to allow the DOD to conduct additional analysis on this matter. Accordingly, this still may be an evolving area of law, and we advise you to stay tuned for updates. We will relay any information we learn to our dealer clients.
If you have any questions regarding this topic or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or [email protected].