RIP to coverage exemption case?

Many in the auto finance industry are optimistic a recent appeals court ruling about the Military Lending Act will put the case to rest.

The U.S. Court of Appeals for the 4th Circuit on April 12 affirmed a lower court’s decision that bundling guaranteed asset protection coverage does not make an auto loan subject to the Military Lending Act. Two of the three judges ruled that based on the law’s language, a retail installment contract that finances the vehicle purchase and guaranteed asset protection coverage “is for the express purpose of financing the car purchase” and therefore does not fall within the definition of consumer credit covered by the Military Lending Act.

“This ensures that thousands of vehicles owned by service members and their families will not be in jeopardy or subject to repossession,” the American Financial Services Association said in a statement. “This case again highlights flaws of the [Military Lending Act], which we hope Congress and the Department of Defense will examine to ensure our military service members and their families have access to the credit they need and deserve.”

Neither attorneys for plaintiff Jerry Davidson, a member of the U.S. Army who filed the lawsuit in 2020, nor officials from the departments of Justice and Defense — who argued a car loan that includes guaranteed asset protection financing would not receive the Military Lending Act exemption — have commented on the court’s decision. It is unknown whether Davidson will ask the entire 4th Circuit to review the panel’s decision or take the case to the U.S. Supreme Court. In both instances, such requests are rarely granted.

Robert Gage, a Michigan partner for Hudson Cook LLP, told Automotive News the Davidson decision should give auto financers more confidence they can continue to finance the coverage in auto loans with the law’s covered borrowers. Gage frequently represents consumer auto finance lenders on matters of regulatory compliance, including the Military Lending Act.

“This has been a bit of a game of ping-pong,” Gage said of the long legal battle. “There’s been this constant back-and-forth of whether we can or can’t include [guaranteed asset protection] in these transactions. Davidson is giving us more certainty that we can, and that is less likely to change in the future.”

Davidson sued United Auto of Fort Worth, Texas, alleging the lender did not provide the proper law disclosures and credit-related costs when the loan for his used GMC Acadia was originated in 2018.

Lawyers for defendant United Auto had argued the lower court correctly ruled under the “plain language” of the statute. The guaranteed asset protection loan was secured by the car and was for the purpose of financing it.

The appellate opinion reaffirms a district court’s June 2021 decision in the class-action lawsuit Davidson v. United Auto Credit Corp.
Dealership finance-and-insurance staff commonly offer consumers the option to purchase the protection at the time of financing, which covers the balance between an insurance company’s estimated value of a damaged vehicle vs. the amount originally financed.
In the initial case, Davidson sought statutory damages of $500 per violation for himself and others affected in the class-action suit. He also asked that his coverage contract and the contracts of the other class members be voided. U.S. District Judge Leonie Brinkema on May 19, 2021, granted United Auto’s motion to dismiss the lawsuit. Based on the law’s language, the other costs financed in the car deal were exempt, Brinkema ruled.

If the appeal had been successful, Kawski said in a written statement, “it would have overturned the long-held interpretation of the [Military Lending Act], adversely affected members of the military, disrupted current business practices and impacted the secondary market. We are pleased with the Court’s decision.”