Four trade groups have sent letters to the Department of Defense (DoD) asking the DoD to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act final rule (MLA Rule) and its December 2017 amendments to the interpretive rule.  One letter was sent by the National Association of Federally-Insured Credit Unions (NAFCU) and the Defense Credit Union Council (DCUC) and another was sent by the Credit Union National Association (CUNA) and the DCUC.

In amended Q&A 2, the DoD addressed the application of the MLA Rule’s exemptions for credit transactions that are intended to finance the purchase of a motor vehicle or personal property when the credit is secured by the purchased motor vehicle or personal property.  The amended question to which the DoD responded asked whether the exemptions would apply where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property.  The DoD’s amended answer stated that the exemptions are available where credit beyond the purchase price of the object is used to finance “any costs expressly related to the that object…provided it does not also finance any credit-related product or service.”

In the amended interpretive rule, the DoD used a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle) and also finances optional leather seats and an extended vehicle warranty as an example of a credit transaction that would be eligible for the MLA exemption.  In contrast, the DoD used a credit transaction that includes financing for GAP insurance or a credit insurance premium as an example of a credit transaction that would not be exempt from the MLA.

In their letter, the NAFCU and DCUC assert that the DoD’s interpretation, by virtually prohibiting an MLA-covered borrower’s access to GAP insurance when purchasing a motor vehicle, “has the potential to cause significant financial hardship as GAP insurance is protection against situations when the purchased vehicle is destroyed or stolen when the value of the car is less than the remaining loan balance.“  They also assert that “[u]nlike other forms of insurance coverage, there is no equivalent to GAP insurance protection provided to active duty servicemembers or their dependents by mere virtue of their service status.”  They state that they “continue to hear from {their respective credit union] members that many third-party vendors are no longer providing the option for a servicemember to obtain GAP insurance,” a result the trade groups call “a byproduct of the Department’s promulgation of Question #2.”

The letter from the CUNA and DCUC similarly asserts that the language in Q&A 2 “is harmful [to servicemembers]” and also asserts that such language is “seemingly inconsistent with a common reading of the regulatory text.”

In asking the DoD to rescind or withdraw Q&A 2, we presume the trade groups are seeking a further amendment to Q&A 2 that would provide that a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle) can also finance the purchase of GAP insurance without losing the MLA exemption for purchase money financing.  If the DoD guidance were to be rescinded or withdrawn rather than amended, uncertainty would likely remain over the application of the MLA exemption to purchase money transactions that also finance the purchase of GAP insurance.