If you are in the auto finance business, you cannot possibly have missed the drama percolating around the Department of Defense’s (DoD’s) new interpretation of its own regulation’s purchase-money vehicle finance exclusion, which says transactions with GAP, credit insurance, or other credit-related ancillary products are not within said exclusion. Rather, those products are “consumer credit” transactions subject to the Military Lending Act (MLA). We’ll call this the “GAP problem,” and I’ll explain it in a minute.
The MLA and the DoD regulation provide that if financing for a MLA-covered servicemember is for the express purpose of purchasing a vehicle, the loan isn’t subject to the MLA. We’ll call this the “exclusion.” Until the recent GAP problem, the industry read these provisions as preserving standard new- and used-car financing. The GAP problem arises from the DoD’s recent interpretation of these provisions in a way that knocks purchase-money auto finance transactions out of the exclusion if GAP, credit insurance, or other credit-related ancillary products (credit protection products) are included. And not just going forward, but all the way back to October 2016. Before the DoD published its new interpretation in December 2017, we all thought it was business as usual for auto finance. Now, the DoD has — I think, unwittingly — caused a crisis of epic proportions in the industry.
Let’s get up to speed. Under the MLA, “consumer credit” is a defined term that, until the DoD added it in as of October 2016, didn’t include auto finance. Thus, the need for the contemporaneous exclusion. The DoD published some interpretive Q&A about non-motor vehicle personal property financing that muddied the waters about the extent of the exclusion, and the industry asked for clarification. Under the heading of, “be careful what you wish (ask) for,” we got the clarification that is the GAP problem.
