The Department of Defense last week withdrew a provision to the Military Lending Act (MLA) that prevented adding guaranteed asset protection (GAP) warranties to vehicle loans for servicemembers. The move was celebrated by industry organizations as the liability for both lenders and borrowers decreased with the change, John Redding, a partner at Buckley LLP, told Auto Finance News.
In December 2017, the DOD amended an earlier MLA interpretive rule to clarify that vehicle loans are not exempt if they finance “any credit-related product or service,” such as GAP. The American Bankers Association formally requested the DOD to withdraw the provision in 2018, writing that interpretation was inconsistent with the statute and the regulation, and created uncertainty, compliance burdens and substantial potential liability for dealers and lenders.
“For years, [lenders] understood that they could finance GAP into the transaction, and it will be exempt from MLA because it was a purchase transaction,” Redding said. “So, that guidance really created some issues. And honestly, it worked to the detriment of the servicemembers it was intended to protect.”
The guidance prevented servicemembers from financing GAP with their loan, which meant that they were more open to liability if something were to go wrong with the vehicle. Now, however, lenders can finance GAP without falling under the rules of the MLA.
“Imagine a servicemember is purchasing a $10,000, $12,000 motorcycle and that motorcycle gets totaled under the prior guidance,” Redding said. “They wouldn’t have had GAP, and so they’d have been responsible for any remaining amount on the loan. Now, I, as a powersports finance company, can allow that gap product to be financed into the transaction. And therefore, I can withdraw or pull back my decision not to finance these contracts. So, it really is good for military and good for the businesses.”
