On Feb. 28, the Department of Defense (DoD) finally pulled back a problematic question they had tried to clarify in guidance in 2017. This is great news for credit unions and auto dealers, but most of all for members of the armed forced and their families. They are now able to purchase GAP and other similar coverages for their vehicle investments without it impacting their qualification under the Military Lending Act and the protections afforded to them there.
Let me explain further. In July 2015, the protections of the MLA were expanded to include a broader range of closed-end and open-end credit products. The rule was vague and needed clarity (since it did not go through the regular channels of rulemaking and input from stakeholders if it had been implemented by a federal agency). In August 2016, the DoD issued the first set of interpretations in the form of questions and answers (see link below). There was still confusion on a few points they raised, so in December 2017, the DoD issued a second set of interpretations (see link below). Are you still with me?
In the 2017 interpretation, the DoD addressed this question (#2) “Does credit that a creditor extends for the purpose of purchasing a motor vehicle or personal property, which secures the credit, fall within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property?”
In their answer, DoD confirmed that as long as the financing was related to the financing of the object securing the credit (they used the example of upgrading to leather seats), the exemption was not lost. But, they went on (and this is where the surprise and problem with the interpretation has been) to state that any financing of “credit-related costs” such as GAP insurance would cause the exemption from MLA requirements to be lost.
In the weeks following that Dec. 2017 letter, the shuffle for understanding the intent of that statement had broad impact. Dealerships were advised they could not sell GAP to covered borrowers, credit unions were told they could only sell the product if the loans were closed at the credit union, or not at all to covered borrowers. The work with DoD for clarification to something that was intended to help the financial health of their members started that day. Now just over two years later, after much work by credit unions and others, we have a pull-back of that problematic question.
The DoD is now withdrawing the amended question and answer number 2 (Q&A #2), published in the December 2017 Interpretive Rule, and reverting back to the original Q&A #2 published in the August 2016 Interpretive Rule. If you are a credit union involved in indirect lending, you should expect to hear from your dealers soon about them changing their practice to once again include GAP-type products at the dealership closing.
Oh yeah, and the DoD left this little nugget at the end of their Feb. 2020 statement, “This will allow the Department to conduct additional analysis on this matter.” Let’s hope they involve some stakeholders before issuing any more confusing interpretations.