GNYADA February 2020 Newsletter

Dealer Group Sued for Military Lending Act Violations

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New York has a law prohibiting dis- crimination against service mem- bers in the context of credit deci- sions so don’t reject a service mem- ber’s credit application to avoid dealing with the MLA. Dealers who offer financing to active duty service members and their dependents should consult with their dealership attorney to ensure they are complying with the MLA. Talk to your financing institu- tions to find out their MLA poli- cies. It is likely that many will report that they will not accept credit contracts with covered borrowers if it includes credit- related products that trigger the MLA. Since New York requires GAP be offered in certain circum- stances, it is likely the financing company will tell consumers they are not responsible for the GAP if there is a loss to avoid triggering the statute. What should dealers do now? n n n

NADA recently alerted members about the first known Military Lending Act (MLA) lawsuit against a dealer. An active duty service member has filed a class action law- suit in federal district court in Florida against an Arizona-based dealership group asking for contracts to be voided, $500 per violation, monetary damages, and legal fees. This lawsuit is based on a 2017 Department of Defense (DOD) MLA interpretation, which says that including credit-related products such as Guaranteed Automobile Protection (“GAP”) and credit insur- ance in a motor vehicle retail install- ment contract with covered borrow- ers subjects the transaction to the MLA. MLA FAQ What is the MLA and who does it apply to? The MLA, enacted in 2006, pro- hibits extending consumer credit with a military annual percentage rate of credit that exceeds 36% to covered borrowers. The MAPR “includes all cost elements associat- ed with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary products sold with any extension of credit to a servicemember or the service- member’s dependent, as applicable, and any other charge or premium with respect to the extension of con- sumer credit.” If the MAPR is 36% or lower, the creditor must still comply with a series of duties and restrictions, including providing certain disclo- sures about the MAPR in addition to those required under the Truth in Lending Act and excluding certain provisions from the credit contract.

Who are covered borrowers? Active duty members of the military and their dependents. How do I know if someone is a covered borrower? There are two “safe harbor” methods for determining if someone is a covered borrower. Either entering the consumer’s last name, date of birth and Social Security number into https://mla.dmdc.osd.mil/mla/#/home or accessing a “statement, code, or similar indicator” describing mili- tary status from a consumer report- ing agency. How does the MLA impact sales to covered borrowers? Under DOD’s 2017 interpretation, if a credit-related product such as GAP and credit insurance is includ- ed in a motor vehicle retail install- ment contract, the transaction is sub- ject to the law’s duties and restric- tions. One of these restrictions pro- hibits non-depository institutions, like dealers, from taking a security interest in the vehicle being financed. Because of this limitation, many finance sources have told dealers that they will not take assignment of credit contracts with covered borrowers that involve GAP Waiver or other credit- related products.

The DOD Interpretive Rule also says that financing only product-related items such as an extended service contract or negative equity in such transactions fits within the motor vehicle financing transaction and therefore does not subject the transaction to the MLA.

4 Greater New York Automobile Dealers Association • www.gnyada.com The Newsletter • February 2020