New Rules Issued for Sales to Military Servicemembers

By Shaun Petersen
Senior Vice President of Legal & Governmental Affairs

In mid-December, the Department of Defense issued a new interpretation of the Military Lending Act impacting sales to members of the military and their dependents.  

When Congress passed the Military Lending Act, it imposed a series of requirements when extending credit to members of the military and their dependents.  However, Congress also created several exemptions to those limitations including for the extension of credit that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the motor vehicle purchased.  Congress included a similar exemption for related to credit extended for the purchase of personal property. 
The new interpretation drastically alters the scope of what the industry previously understood the motor vehicle exemption to include.  Previously, dealers and finance companies understood the motor vehicle exemption to include the extension of credit for all things included in a motor vehicle transaction to include the purchase price of the car, taxes and other state fees, negative equity, and voluntary protection products such as service contracts, GAP, etc. 
Now, the DOD has turned that understanding on its head. 
At issue is whether financing above and beyond the purchase price of the vehicle takes the transaction out of the safety net of the exemption.  The DOD's interpretation says it depends on what is being financed. 
“Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.” 
So what are “costs related to the object securing the credit?”  The DOD provided some examples of such costs that fit firmly within the exemption.  Items such as negative trade equity, extended warranties (or service contract), and “optional leather seats within that vehicle.”
What about “financing credit-related costs?”  The DOD says financing items such as GAP, credit insurance, and “additional ‘cashout' financing” are not included within the exemption. 
According to the DOD, any dealer who finances these credit-related costs is subject to the Military Lending Act for transactions as far back as October 3, 2016 even though this interpretation is weeks old. 
So what should you do?  Dealers selling and financing these credit-related products such as GAP and credit insurance should determine whether customers are members of the military or dependents of military servicemembers prior to offering F&I products for sale. Dealers can enter the customer's social security number and birthdate into this at this website: Other services may be available to provide this information.  However, a safe harbor for determining covered persons is available by checking the DOD website above or by subscribing to an MLA offering notated on a credit report from a credit reporting agency. 
If customers are covered by the rule and you decide to sell credit-related products, then specific disclosures must be provided in writing and orally, the transaction is subject to the military APR rate cap of 36%, and other contractual limitations will be imposed including a ban on arbitration provisions. 
But one of the options many are considering to ensure compliance is not offering credit-related products to those covered by the rule.  Dealers will need to determine whether consumer is covered and if so, some are simply informing the covered customers that credit-related products are not offered for sale.
Regardless of which compliance option is chosen, dealers should consult with their local attorneys to determine which products are costs are “credit-related” and thus potentially subject to the rule.  Your individual lawyer can provide you with specific legal advice tailored to your business. 
In the meantime, rest assured that NIADA is working with other interested industry partners, members of Congress, and federal regulators to express concerns with the new rule and the lack of process involved in the issuance of the rule.  DOD did not provide notice of the interpretation or an opportunity for interested parties to comment before it was issued thus precluding NIADA from pointing out the harm that will come to both the military servicemembers and the industry. 
One of our strategies is to illustrate the value of these credit-related products.  So, if you as dealers are aware of any of your military customers that have directly benefited from a GAP, credit insurance, or other similar product, please contact me at the NIADA headquarters (817.640.3838).  


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