The Department of Defense (DoD) threw a wrench into servicemember compliance that’s causing lenders to stop funding contracts with GAP insurance to military members, lawyers told Auto Finance News.
The change stems from a December clarification to a Military Lending Act bulletin. Historically, auto loans have been exempt from the MLA, which places restrictions, such as banning mandatory arbitration clauses and placing a cap on interest rates, on other consumer loan products. However, under new guidance from the DoD, servicemembers and their dependents who are sold ancillary products no longer qualify for that exemption.
“We are still evaluating and reviewing the changes we will need to make, to ensure we continue to remain compliant with the MLA,” a Toyota Financial Services spokesman told AFN. “In the meantime, we have encouraged our dealers to conduct their own legal review, as well.”
Some lenders are checking the Defense Manpower Data Center (DMDC) before funding contracts with GAP, and some are taking the extra step of ordering dealers to repurchase any contract where there is a covered borrower who was sold GAP, David Gemperle, attorney in the auto finance group at Nisen & Elliott, told AFN.
“Congress established the MLA to address certain credit practices, which it was concerned negatively affected the readiness of the force,” Navy Cmdr. Mike Cody, a Defense Department spokesman, told AFN. “The Department has carried forth that intent in implementing its rules and interpretations.”
Most major lenders, at a minimum, are putting out bulletins to dealers to check the DMDC, but there’s no guarantee every dealer is doing that, Gemperle said. “Implementing new processes takes time,” Gemperle said. “It’s possible that if [lenders] implemented the process of checking [the DMDC] now, they’d end up spending money to apply for a rule that will get revoked statutorily or with another regulatory push.”