Department of Defense Reinterprets Military Lending Act Guidance on Auto Financing

In February, the Department of Defense (“DoD”) amended its interpretation of the Military Lending Act (“MLA”). The amendment should make it easier for many lenders to provide guaranteed asset protection (“GAP”) insurance or other credit insurance in connection with auto loans to covered servicemembers or their dependents.

MLA and “Q&A #2”

The MLA prohibits creditors from charging more than a 36 percent “military annual percentage rate” (“MAPR”) on credit transactions to covered persons. It also, among other requirements and restrictions, prohibits taking the title to a motor vehicle as security for a credit transaction, unless the creditor is a federal or state bank, savings association, or credit union. However, the MLA exempts several types of transactions from those restrictions, including a credit transaction to finance the purchase of a motor vehicle or other personal property when the credit is secured by that vehicle or property.

In addition to regulations, in 2016 the DoD issued interpretive guidance on the MLA in the form of questions and answers, and amended that guidance in 2017. One question-and-answer in the 2016 guidance (“Q&A #2”) advised that when a lender extends credit in excess of an item’s purchase price (such as a hybrid purchase-money and cash-advance loan), the loan is not exempt from the MLA. Initially, Q&A #2 was limited to secured personal property loans. However, in the 2017 amendments mentioned above, the DoD stated that the interpretation applied to secured motor vehicle loans, too. (See Mayer Brown’s Legal Update on the 2017 amendments and other updates.)

Accordingly, based on the 2017 Q&A #2, an auto purchase loan that included GAP insurance would not be exempt from the MLA or its regulations, unless the lender was a depository institution. Since those loans would be deemed subject to the MLA, they would not only be subject to the 36% MAPR limitation, but also to the prohibition against securing the transaction with the vehicle’s title. That interpretation effectively forced certain creditors to choose either not to finance (or not to offer) GAP products, or not to secure the loan with an interest in the vehicle’s title. Some also argued that the 2017 Q&A #2 was a change in interpretation that the agency should have applied only prospectively, and it should not apply to existing auto loans with GAP insurance.

DoD Updates to MLA Guidance

On February 28, 2020, the DoD withdrew the 2017 Q&A #2, reverting to its original version. It expressly applies only to credit for the purpose of purchasing personal property (and not a motor vehicle), where the creditor simultaneously extends credit in an amount greater than the purchase price. The 2020 Q&A #2 answers that a personal property loans is exempt if the transaction is expressly intended to finance only the acquisition of that property when the credit is secured by the property, and not if the loan also secures an additional cash advance. The Q&A no longer expressly applies to motor vehicle loans.

The new guidance will likely lead to increased servicemember access to GAP insurance and other credit-related products in connection with auto loans. The DoD stated that it found merit in creditors’ concern over their ability to technically comply with the MLA and its regulations as interpreted, although the agency stated that it plans to conduct additional analysis related to those concerns.

New Q&A #21

As a part of the February 2020 update, the DoD also added Q&A #21. The new Q&A clarifies that when an individual does not have a social security number, a creditor may use the individual’s taxpayer identification number to determine if the individual is a covered borrower for MLA purposes in the DoD’s database.