December Ruling On MLA Impacts Dealership Lending Practices
On December 14, 2017, the Department of Defense (“DOD”) issued a ruling on the Military Lending Act (“MLA”) that will affect dealership financing of a vehicle on all loan transactions entered into since October 3, 2016.
The MLA imposes a series of duties and restrictions on creditors who extend credit to certain military members and their spouses and dependents. To determine whether a prospective borrower is subject to the MLA, dealership lending departments need to ask the prospective borrower if he or she is a service member or if he or she is a spouse or dependent of a service member. If the prospective borrower is a service member or a spouse or dependent of one, dealerships should verify whether the prospective borrower is covered by the MLA by running a search at https://mia.dmdc.osd.mil/. If he or she is covered by the MLA, the DOD’s December ruling applies.
Based on the DOD’s December ruling and if dealership lending departments wish to keep their loan transactions exempt from the requirements of the MLA, the following cannot and should not be included in any loan transaction with a service member covered by the MLA:
- Financing for Guaranteed Auto Protection (“GAP”) insurance;
- Financing for a credit life or disability insurance premium; and
- “Cash-out” Financing, i.e., a loan transaction that includes a hybrid purchase money and cash advance credit transaction.
The following may be included in any loan transaction with a service member covered by the MLA and be exempt from the requirements of the MLA:
- Financing of optional accessories installed on the vehicle if the loan transaction finances the purchase of the vehicle and is secured by that vehicle;
- Financing of extended warranties for service of a vehicle if the loan transaction finances the purchase of the vehicle and is secured by that vehicle;
- Financing negative trade equity, i.e., a borrower trades in a vehicle with negative equity as part of the purchase of another vehicle and the loan transaction to purchase the second vehicle includes financing to repay the credit on the trade-in vehicle.
Unfortunately, the DOD’s December ruling did not address all items that often are included in vehicle financing that would be of interest to dealerships. For instance, the DOD did not address whether financing of Etch and other anti-theft products, Vehicle Protection products like exterior coatings, Wheel and Tire and similar Plans, or Document Preparation Fees for borrowers covered by the MLA would make the loan transaction subject to the MLA and, therefore, subject to its requirements. However, there is a sound legal basis for arguing the financing of anti-theft products, Vehicle Protection products, Wheel and Tire and similar Plans, and Document Preparation Fees are exempt from the requirements of the MLA. The financing of these items is analogous to financing accessories or extended warranties for service of a vehicle, which can be included in a loan transaction without it triggering MLA compliance. This analysis may be revised if the DOD issues a formal ruling stating otherwise.
We would recommend this memorandum be shared with all employees working in dealership F&I departments, and will keep you informed and updated about any further DOD rulings on the MLA that might affect dealership financing operations. Please contact our firm if you would like further clarification of any issues.
If you have questions or concerns, we are here to help.
Call Geoff Grodner or Dustin Plummer at 812-332-5000.