A recently dismissed case in the Eastern District Court of Virginia against subprime lender United Auto Credit has provided a brief respite to the auto finance industry even as there is a movement to try to incorporate federal Military Lending Act (MLA) guidance to auto loans. Under current regulations, retail installment contracts and auto loans for the purpose of financing a motor vehicle are not subject to MLA guidelines.
The customer, an active-duty service member, alleged that the contract was in violation of the MLA because it failed to include disclosures of a $250 processing fee, a $350 fee for Guaranteed Asset Protection (GAP) insurance, a $129.61 charge for prepaid interest, and violated the statute because it did not disclose the true cost of financing, according to the court filing.
In short, the argument was that because the contract included GAP, it was subject to the MLA.
United Auto claimed the contract was not subject to the MLA because it was made for the express purpose of purchasing a vehicle and therefore, by the letter of the law, could not violate MLA. The court sided with United Auto and dismissed the case.
The larger issue at hand however, according to Marci Kawski leader of the consumer financial services practice at law firm Husch Blackwell, is whether the court would interpret the plain meaning of statutes and regulation and correctly conclude that this type of transaction is not subject to the MLA.
In 2017, the DOD changed its interpretive guidance to say that the attachment of GAP products on an auto finance transaction made it so the contract was no longer expressly made for the purpose of purchasing a car, and instead subject to the definition of consumer credit under the MLA. Under the provisions of the MLA, certain auto lenders may not be able to take a security interest in the vehicle title.
“Of course, this caused a lot of disturbance in the industry and affected the offering of these other [GAP] products to active-duty members of the military,” Kawski said. “This is because there was a concern that the transaction would be subject to the MLA, and there is uncertainty that some lenders may be unable to take a security interest in the vehicle when the transaction is subject to the MLA,” Kawski said.
Then, in 2020, the DOD withdrew that guidance, allowing auto lenders to include GAP products in auto finance transactions without making the transaction subject MLA.
The customer plaintiff in the United Auto suit however, argued that the statute and regulation is not clear, and the court should look at all the interpretive guidance issued in the interim. The judge ultimately leaned on the language of the law.
While the decision of the Eastern District Court of Virginia is persuasive, it is not binding, Kawski said, noting that an appeal is due to the court by June 18.
“If there is an appeal, the decision made by the court of appeals would be binding on the lower courts in that circuit, but not in other circuits,” Kawski said.
The MLAs role over regulating auto finance has been wavering in recent years. In 2019, former Consumer Financial Protection Bureau Director Kathleen Kraninger asked the U.S. Congress to give the Bureau power to supervise compliance over the MLA. Earlier this year, Illinois State Legislature adopted the MLA’s 36% all-in rate cap on all consumer loans, including auto, and other states are allegedly eyeing similar all-in rate caps that use the MLA’s calculation.