The Department of Defense reversed its guidance on the Military Lending Act, clearing confusion that has prevented automotive dealers from selling guaranteed asset protection, or GAP, to military members and covered relatives.
The Pentagon said Thursday it was withdrawing part of a previously amended Q&A published in the December 2017 Interpretive Rule that tried to define the scope of motor vehicle financing exclusion in the Military Lending Act.
The department granted a joint petition filed by the National Automobile Dealers Association and the American Financial Services Association to withdraw Q&A 2, which “interpreted the MLA in a way that effectively prevented auto dealers from making [GAP] waiver coverage available to service members,” NADA said in a news release.
The change is a victory for dealers, many of whom effectively halted GAP sales for fear of running afoul of the rule.
“We are thrilled with the decision by the administration and the Pentagon to withdraw Q&A 2,” Bill Himpler, CEO of AFSA, said in a statement to Automotive News. “We’ve been working with our allies, particularly NADA, to address what we see is very much a detriment to credit product availability to service members. All we want is to make sure service members have access to the same credit products as other Americans to protect their interests.”
The Pentagon’s December 2017 decision to revise its interpretation of the rule led to confusion among dealers. The act, a 2006 law designed to protect active duty service members and their dependents in credit transactions, did not previously apply to motor vehicle finance transactions — only auto title loans. The protections include certain disclosures, arbitration provisions and a 36 percent interest rate cap on a finance agreement combined with ancillary and credit products.
Under the 2017 interpretation, if a vehicle finance contract for active military members or their dependents includes financing for credit-related products or services, such as GAP or other types of credit insurance, or provides cash-out financing, the creditor — which would be the dealership or lender — must comply with the act.
The Pentagon also resolved that the act had included vehicle financing and various products since the rule was amended Oct. 3, 2016, retroactively applying to deals done between then and the revision.
The department’s issuance of Q&A 2 “unnecessarily exposed service members to significant liability by effectively eliminating their ability to adequately protect themselves from incurring financial losses” if the vehicle was declared a total loss, NADA said.
Franchised dealer and auto finance interest groups including NADA and AFSA prioritized efforts to reverse the change.
In January 2018, the two associations jointly petitioned the Pentagon to withdraw Q&A 2, stating in a letter that the section “impermissibly narrowed” the reach of the motor vehicle financial exclusion Congress created when the act was approved, was issued in a “uninformed” manner without standard procedures and harmed military members.
In explaining its decision, the Pentagon cited a concern that creditors would technically be unable to comply with the act “if the purchase included products not expressly related to the purchase of the vehicle,” as described in Q&A 2. The department, in documents not yet published online, said “it finds merit in this concern and agrees additional analysis is warranted.”
Jackie Charniga and Hannah Lutz contributed to this report.