In January 2021, a federal court in Virginia heard arguments in a case involving the application of the federal Military Lending Act (MLA). The case is a class action involving a creditor that allegedly failed to comply with the MLA in connection with retail installment contracts for the sale of motor vehicles.
When the MLA applies to a credit transaction, specific MLA disclosures must be provided and the loan is subject to a 36% Military Annual Percentage Rate (MAPR). The MLA does not apply to loans that are “expressly intended to finance the purchase” of motor vehicles where the loan is secured by the motor vehicle.
The Virginia class action alleges that because the creditor financed costs in addition to the cost of the subject vehicles, including the cost of guaranteed asset protection (GAP) waivers, the creditor’s loans were covered by the MLA. If the inclusion of GAP coverage takes the loans out of the exception for coverage by the MLA, then the creditor failed to provide required MLA disclosures and charged more than the permitted MAPR.
The class action complaint asserts that the plaintiffs are entitled to remedies, such as rescission and/or damages. The hearing last month involved consideration of the creditor’s motion to dismiss the class complaint. If the court denies the motion to dismiss and allows the case to proceed, the case’s outcome could have wide-ranging consequences for lenders who finance the purchase of motor vehicles.
This case arrives on the heels of guidance from the U.S. Department of Defense (DOD) in February 2020, providing updates to prior MLA guidance. The 2020 interpretive guidance reversed the DOD’s 2017 guidance, which made it clear that the inclusion of GAP coverage takes a loan out of the exception to MLA applicability. The 2017 Q&A No. 2 indicated that if a creditor financed certain ancillary products (e.g., a GAP waiver) in connection with the purchase of a motor vehicle, then that loan would not be exempt from MLA coverage. The 2020 interpretive guidance reverses that Q&A answer and restores a 2016 version of Q&A No. 2, which only addressed cash-out loans involving personal property. With the restoration of the 2016 interpretive guidance, the effect of including GAP coverage on purchase-money loans secured by motor vehicles remains unclear. In the notes accompanying the 2020 interpretive guidance, the DOD strongly indicated that this would not be the final word on this topic.
Practice Pointer: Credit unions that are engaged in indirect auto lending should review existing seller/creditor disclosures to determine if MLA disclosures are included and if system limitations for MAPR limits are in place for transactions subject to the MLA. In addition, many states, including Maryland, have state-specific GAP limitations that must be followed. Lenders, including credit unions, should consider a review of GAP waiver forms in use for direct and indirect loans to determine if they comply with state-specific limitations.
We will continue to monitor the Virginia class action and provide updates as it progresses.
Christopher R. Rahl
410-576-4222 • firstname.lastname@example.org
John H. Hykes, III
410-576-4134 • email@example.com