New MLA interpretive guidance requires action by dealers

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On December 14, 2017, the Department of Defense (DOD) published new interpretive guidance of the Military Lending Act (MLA) that affects car dealers who sell GAP contracts and other credit-related services and products.

Congress passed the MLA in 2006 to provide specific protections to active duty service members and their dependents from perceived predatory lending. Auto dealers have to date largely relied on an exception in the MLA regulations that removes most financed vehicle purchases from the protections of the MLA. Due to the new DOD interpretation, vehicle sales to active service members and their families that include credit-related products and services such as GAP contracts must comply with the MLA.

The MLA provides three basic sets of protections to active-duty service members and their dependents in consumer transactions. The law:

  • Limits the Military Annual Percentage Rate (MAPR) for covered products to 36%, including fees;
  • Requires specific oral and written disclosures; and
  • Prohibits creditors from requiring a service member to submit to arbitration in the event of a dispute.

Each of these provisions poses compliance challenges for motor vehicle dealers.

Dealers who violate the MLA face severe consequences:

  • Any credit transaction that violates the MLA is void, i.e. unenforceable against the service member;
  • Civil liability for actual damages (but not less than $500 for each violation), punitive damages, equitable or declaratory relief, and attorney’s fees; and
  • For knowing violations, criminal liability including fines and imprisonment.

Auto dealers may present a defense to civil liability by showing that the violation was unintentional and the result of a bona fide error notwithstanding the maintenance of reasonable procedures to avoid such errors. Ignorance of the law is not a defense.

Every car dealership should develop a MLA compliance policy and implement a MLA compliance program. Please contact your retail auto dealer attorney to discuss the best options for your dealership.