MLA Compliance: One Year After the DoD’s Rule, Dealers Remain in the Dark
Break out the streamers and start placing those custom cake orders, because a one-year anniversary is coming up! Yes, it’s almost been a year since the Department of Defense threw the auto finance industry into chaos by issuing an interpretive rule about the Military Lending Act.
You know, forget the cake—maybe this “celebration” calls for a stiff drink.
Last year, as you may already know, the DoD issued a much-maligned interpretative memorandum that, while meant to clarify auto lenders’ obligations under the MLA, did anything but. For the first time, the DoD stated that the MLA might bear on a credit transaction intended to finance the purchase of a motor vehicle. I’ll let our friends at Hudson Cook explain the details:
“The DOD dramatically changed that interpretation when it published its interpretive rule with the ‘clarifying’ FAQ #2, stating that financing ‘credit-related costs’ disqualifies the transaction from the exclusion. Though the DOD failed to define the term ‘credit-related costs,’ it did provide several examples of what types of products or services, if financed, would disqualify a transaction from the MLA’s purchase-money exclusion-namely, GAP and credit insurance. In other words, if a purchase-money transaction also finances ‘credit-related costs,’ then the transaction is covered under the MLA. The MLA requires creditors to identify covered borrowers, provide required verbal and written disclosures, calculate the Military Annual Percentage Rate of the transaction, and comply with other MLA consumer protections…
Conversely, FAQ #2 stated that if the transaction finances ‘costs related to the object securing the credit,’ then it still qualifies for the MLA’s exclusion. Again, the FAQ didn’t define the term, but provided examples-leather seats, extended warranties, and negative equity.”
Attorneys Patricia E.M. Covington and Erica A.N. Kramer go on to explain that the DoD’s new interpretation of the MLA effectively bars dealers from securing a credit transaction with a motor vehicle title, thereby “destroy[ing] the practicality and economics of financing the purchase of a vehicle with a credit-related product.” This is, of course, bad news for the industry, as “[no finance source in its right mind will make an unsecured loan, or purchase a retail installment sale contract, without obtaining a security interest in the vehicle as collateral.”
So, what should dealers caught in this “Catch-22 situation” do, and what are the DoD and the auto finance industry doing to escape the current quagmire? Sorry to say, it’s not exactly pretty or clear. Sit down with some comfort food or drink and read what the attorneys recommend here.
