The Department of Defense announced in its Fall 2019 rulemaking agenda that it is engaged in proposed rulemaking to amend its Military Lending Act (MLA) regulations, apparently in order to allow non-bank creditors to provide secured auto financing for purchase transactions. (The DoD’s agenda was filed as part of the Fall 2019 Unified Agenda of Federal Regulatory and Deregulatory Actions, which is coordinated by the Office of Management and Budget.)
The DoD indicates that the purpose of the amendment is “to ensure continued access to reasonable credit by Service members and families to finance a motor vehicle purchase and reduce the burden and risk to business of potentially extending unsecured credit for such transactions.” The DoD notes that at present the MLA prohibits the use of a motor vehicle as security for a credit transaction unless the creditor is chartered or licensed under federal or state law as a bank, savings association, or credit union.
How did we get here? When the DoD expanded the scope of the MLA regulations in 2015, consistent with the purchase money exception in Section 987(h)(6) of the MLA, it specifically excepted from the scope of the new regulations any credit transaction with a covered borrower that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the motor vehicle being purchased.
However, the DoD further limited the exception when, without any real discussion, it equated purchase transactions with vehicle title loans, which are prohibited by Section 987(e)(5) of the MLA. In describing its rationale for allowing banks, thrifts and credit unions to use a motor vehicle as security for a credit transaction, the DoD stated that the carve out was necessary to avoid denying opportunities for covered borrowers to refinance “existing auto loans” (NOT vehicle title loans) in order to get reduced rates from banks, thrifts and credit unions, as those transactions would otherwise be prohibited. The proposed amendment would apparently now allow non-banks to also provide such refinancing opportunities to covered borrowers.
While we strongly support this change, we would also like to see the DoD revisit its controversial position on GAP insurance, something that, unfortunately, appears to be outside of the scope of the rulemaking proceeding contemplated by the DoD. The DoD’s position on GAP insurance is similarly based on an unduly narrow interpretation of the MLA purchase money exception for consumer credit transactions “expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased.” As interpreted by the DoD, a transaction qualifies for the purchase money exception when costs related to the motor vehicle securing the credit are financed. But the transaction is disqualified from the MLA’s purchase-money exception if it includes any credit-related costs, such as financing for GAP and credit insurance.
Of course, we have only seen the DoD’s agenda item and not an actual proposed rule. We will provide an update when the proposed rule is published, and we encourage the industry to use this opportunity to submit comments addressing the GAP insurance issue and any other aspect of the proposed rule that might merit comment.