New Interpretation of Military Lending Act Impacts Sale of
GAP to Active Duty Military Members & Their Dependents
On October 3, 2016, new Military Lending Act (MLA) protections went into effect. The updates to the MLA included a wide range of credit products that were not previously covered under the Act, providing new protections to active-duty personnel and their spouse and dependents. These protections include:
Limiting APR to 36 percent
A prohibition against required arbitration for disputes
Generally, the financing of vehicles was previously considered exempt from the MLA requirement. However, on December 14 2017, the Department of Defense (DoD) issued an amended interpretive rule that states:
[A] credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle), and also finances optional leather seats within that vehicle and an extended warranty for service of that vehicle is eligible for the [exemption]. (Federal Register, Vol. 82, No. 239, page 58740, December 14, 2017.)
That was the good news. The bad (and shocking) news was what followed:
[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.)
CBC recommends all customers seek proper guidance and advice from your legal counsel and/or regulatory compliance advisor. If you determine that your business is not exempt from the MLA requirement, it is essential that you verify active-duty military status based on the information provided by the DoD on every loan application you process. Performing this one vital step will allow you to satisfy the safe harbor provision of the MLA.
CBC offers real-time verification of active-duty military status directly from the DoD, available as an add-on to every credit report inquiry request. You will receive a “Covered” or “Non-Covered” response based on information from the DoD, so you can maintain MLA compliance and meet the safe harbor provision.
What are the consequences of violating the MLA Rules?
Knowingly violating the MLA or its implementing regulation is a misdemeanor under the criminal code of the United States. Penalties include a fine and imprisonment of not more than one year. Also, a person who violates the MLA and its implementing regulation is civilly liable to a covered borrower for:
Any actual damages resulting from the violation, but not less than $500, for each violation;
Appropriate punitive damages;
Appropriate equitable or declaratory relief;
Costs of the action and reasonable attorney fees as determined by the court, where the covered borrower succeeds in the action; and