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Military Lending Act Interpretive Rule: Purchase Money Vehicle and Personal Property Loans Covered When GAP or Credit Insurance is Financed or Cash-out Financing is Provided

On December 14, 2017, the Department of Defense (“DOD”) issued a new Interpretative Rule (“Rule”) for the Military Lending Act (“MLA”). The new Rule interprets the MLA as requiring that creditors comply with MLA requirements if credit is extended for the purpose of purchasing a motor vehicle or personal property and the credit transaction also finances a credit-related product or service (e.g. GAP or credit insurance) or provides cash-out financing.  Under existing law, purchase money vehicle and purchase money personal property loans are excluded from MLA coverage.  This new interpretation, however, subjects these loans – purchase money vehicle or purchase money personal property loans – to the MLA when a credit-related product or service is financed or cash out financing is provided as part of the credit transaction.  In other words, by financing a credit-related product or service or providing cash out financing, these loans lose their MLA exemption.  The new Rule is effective immediately.

Banks should now be complying with MLA requirements – including conducting covered borrower checks, providing disclosures, and calculating and staying within a 36% MAPR – for these loans.  In addition, to the extent your bank participates in an indirect auto lending program, it would be prudent to work with auto dealers to determine if and how they plan to comply with these recent changes.  Given the severe consequences of non-compliance with MLA (e.g. among other things, the contract is void), banks should ensure that these loans or credit sales to covered borrowers are being funded in accordance with the MLA and documentation of compliance (e.g. evidence of a covered borrower check) is a part of the loan file.  Banks should note that there are outstanding, unresolved issues on this matter that auto dealer trade associations are working to resolve, including, for example, the validity of a taking a security interest in applicable purchase money vehicle loans originated by auto dealers. 

Our Franchise & Dealer Law Report has two related posts on this matter. 

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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