What Is The Difference Between Military Lending Act And Scra – In December 2018, the Department of Defense dropped a bombshell (not literally) on the auto finance industry when it issued a new interpretation of the Military Lending Act.
The new interpretation imposes a series of restrictions and requirements on creditors that provide credit-related products and services — such as cash financing and financing for guaranteed auto protection, credit lifetime and credit disability — to active-duty members of the U.S. armed forces. Imposes. forces and dependents of those members.
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- The Military Lending Act (“mla”)
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What Is The Difference Between Military Lending Act And Scra
To keep you informed, here’s some background on the Military Lending Act (or MLA for short), what this new interpretation means, and how industry members can comply with the latest DoD requirements.
The Military Lending Act (“mla”)
We asked Eric Johnson, a partner at the law firm Hudson Cook, to give us some background. (Before you jump in, please note that this article does not constitute legal advice, and heed Eric’s advice for companies to discuss these matters with their lawyers.)
The Military Loan Act was passed by Congress in 2006 and implemented by the Department of Defense (or DoD for short) in 2007. Originally, the Military Lending Act covered three limited categories of “consumer credit.”
There are important exceptions to the definition of “consumer credit” that apply to auto dealers: the law prohibits any credit transaction that is “expressly intended to finance the purchase of a motor vehicle, when that credit is secured by the vehicle; , covers” or “any credit transaction to finance the purchase of personal property.”
The Military Loan Act requires that a creditor cannot charge a covered borrower a “military annual percentage rate” that exceeds 36 percent. Keep in mind that the law’s definition of MAPR is significantly broader than traditional APR: MAPR “includes all cost elements associated with extending credit, including fees, service charges, renewal fees, credit insurance premiums, any incidentals. Products sold, and any other charges or premiums with respect to any extension of credit to a Service Member affiliated with the Service Member.
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The creditor must also provide certain mandatory written disclosures, in a manner similar to the disclosures creditors provide under the Truth in Lending Act Z, but there is also a requirement to provide certain oral disclosures, including MAPR statements, TILA disclosures. and a clear explanation of payment obligations. Creditors may provide this information in person or via a toll-free number. For transactions covered by the Military Lending Act, creditors are prohibited from using other burdensome legal provisions or from invoking arbitration agreements (ie, no class action waivers) in the event of a dispute with the consumer.
In 2013, the law was changed to require the Department of Defense to consult with other federal agencies, such as the Consumer Financial Protection Bureau or the Federal Trade Commission, about possible revisions to the MLA regulations.
Then, in 2015, the MLA changed once again, extending protections to a broader range of closed- and open-end credit products (generally, those covered by the Truth in Lending Act), along with a few changes. expanded further. The good news at that time was that the MLA had imposed disqualifications for…
These changes went into effect on – you guessed it – October 3, 2016. Can you tell where this is going? Continue reading…
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In addition to these changes, there have been 2 interpretations of the MLA provisions. The first was in August 2016, when the Department of Defense issued a Q&A-style interpretive rule with 19 different questions and answers that addressed a wide variety of questions raised by industry and trade groups. The Department of Defense clarified that this interpretive rule did not change the regulations, but rather was a statement of the Department’s previous interpretation.
“Is the credit granted by the creditor for the purpose of purchasing personal property that guarantees the credit, if the creditor at the same time gives credit for an amount greater than the purchase price, is subject to the exemption of “consumer credit”?”
The Defense Department’s response contended that if lenders finance items that are beyond the personal property being financed, the transaction falls outside the scope of the personal property exception in the MLA. In other words, that transaction must comply with the terms of the MLA and related written and oral disclosures, prohibitions on arbitration, restrictions, etc.
This response left readers wondering: Did the Department of Defense take a similarly narrow view of the exclusion of motor vehicle financing?
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And so, last December, the Department of Defense responded to requests for clarification and issued a second interpretation of the MLA rules that brings us to…
In the second interpretation of the Ministry of Defense, the Ministry modified the previous 3 questions and answers and added a new one. Again, the Department stated that this interpretative rule does not change the regulations, but merely states their previous interpretation.
However, this interpretation applies to regulations that were issued in 2015 and entered into force on October 3, 2016. In other words, while the Department of Defense may not consider this rule a change in regulation, it significantly changes how many auto lenders perceive it. of their obligations under the law.
Answer: The answer depends on whether credit in excess of the purchase price of the motor vehicle or personal property is used to finance the financing. Generally, financing costs related to the purpose of the credit provider do not exclude the transaction from the exceptions, but financing costs related to the credit do exclude the transaction from the exceptions.
Final Rule Puts More Teeth Into Military Lending Act > U.s. Department Of Defense > Defense Department News
A credit transaction that finances the object itself, as well as any expenditure expressly related to that object, is subject to the exceptions in § 232.3(f)(2)(ii) and (iii) provided that it does not finance any credit. . -related product or service, for example, a credit transaction financing the purchase of a motor vehicle (and secured by that vehicle), as well as financing optional leather seats on that vehicle and an extended warranty for that vehicle’s service , qualifies for an exception under § 232.3. f) (2) (ii). In addition, if a covered borrower trades in one motor vehicle for negative equity as part of the purchase of another motor vehicle, and the credit transaction for the purchase of the second vehicle includes financing to repay the trade-in vehicle credit, the entire credit transaction It qualifies under § 232.3(f)(2)(ii) because the transaction of the first motor vehicle is expressly related to the purchase of the second motor vehicle.
In contrast, a credit transaction that also finances a credit-related product or service, rather than a product or service expressly related to a motor vehicle or personal property, qualifies for the exceptions in § 232.3(f)(2)( ii) and (iii). For example, a credit transaction that includes financing for “guaranteed auto protection” insurance or credit insurance premiums would not qualify for an exception under § 232.3(f)(2)(ii) or (iii). Similarly, a combined money and cash advance purchase credit transaction is not expressly intended to finance the purchase of a motor vehicle or personal property because the credit transaction provides additional financing unrelated to the purchase. Therefore, any credit transaction that provides secured financing for the purchase of a motor vehicle or personal property along with additional “cash” financing qualifies for the exceptions under § 232.3(f)(2)(ii) and (iii). It is not a condition and must be met. With the provisions contained in the MLA Regulations.
Basically, the Defense Department says it “depends.” Determining whether a credit that exceeds the purchase price of the motor vehicle is granted depends on whether the credit in excess of the purchase price is used for financing.
The ministry’s response divides transactions into two buckets. The first is the costs associated with the purpose of securing the credit – in other words, the costs associated with the motor vehicle securing the credit. If it applies to the object, otherwise that exemption is intact. For example, this includes credit that covers the purchase of a motor vehicle as well as optional leather seats, an extended service warranty or negative equity. Anything that is related to the subject being financed and that provides credit is exempt.
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However, if the expenses are credit expenses, there is no exemption — meaning suddenly the lender must comply with the Military Lending Act. The examples the Department of Defense provides in this section are where the problem lies: The Department provides an example of a credit transaction that includes financing for a GAP, or credit premium, plus cash financing, and explains that these would eliminate the exemption, and that the lender must therefore comply with the Military Loan Act.
If the rule applied only to futures, it would already give lenders a migraine, but remember, this DoD interpretation covers all contracts entered into after October 3, 2016.
And there are serious enforcement regulations and penalties for non-compliance. Knowingly breaking the law is a crime that can result in fines, jail time, or both. Any contract that contradicts the military loan law is void from the beginning. Civil liability exists in the form of actual and punitive damages and attorney fees and costs. The arbitration agreement is unenforceable. And the law can be administratively enforced by, for example, the CFPB, the FTC, or other federal prudential regulators. Last but not least, the statute of limitations is very long: 2 years from discovery, up to 5 years.
Let’s review: A credit transaction that finances the purchase of collateral—and any fees expressly associated with it.
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