Compliance Blog

Earlier this year, we blogged about a class action lawsuit pending in Virginia which alleged a lender violated the Military Lending Act (MLA) in offering vehicle purchase loans. Last week, that court issued a favorable decision, dismissing the case.

As background, the MLA rule has an exception for loans that are “expressly intended to finance the purchase of” a motor vehicle, where the loan is secured by the vehicle being purchased. There is a similar exception for certain loans financing the purchase of personal property. Some past interpretative rules created some confusion about the scope of this exception and what it means for a loan to be “expressly intended” to finance a vehicle purchase. The Department of Defense (DoD) did not address this issue in the original 2015 rulemaking, then issued guidance in 2017 indicating that loans which financed credit-related products like Guaranteed Auto Protection (GAP) would not fit into the rule’s exemption and therefore would be subject to the MLA.

In early 2020, the DoD rescinded that guidance, citing that creditors may be “unable to technically comply” if a vehicle purchase “included products not expressly related” to the purchase. This reverted the guidance to its 2016 state, where “question 2” only references the MLA’s exception for loans expressly intended to finance the purchase of personal property when secured by the property being purchased. More information about the guidance changes can be found in this NAFCU Compliance Blog post.

This lawsuit hinges in part on the meaning of this language in the exception as the plaintiff had purchased a motor vehicle in 2018 and the loan agreement did not contain MLA disclosures. While acknowledging the exception for vehicle purchase loans, the plaintiff was asserting that if a loan “also includes a credit-related product or service such as GAP removes the loan from the exclusion.” This is similar to the position that the Department of Defense (DoD) took in late 2017 but then rescinded. The defendant asserts that the MLA exception applies to these loans and filed a motion asking the court to dismiss the case.

The court looked to both versions of DoD guidance on certain exemptions – both the version that pulled some vehicle purchase loans into the scope of the rule, and the rescission of that guidance. Pointing to the fact that the DoD rescinded the 2017 guidance, the court determined that the MLA does not apply to vehicle purchase loans. The court, in part found that GAP coverage is “a form of insurance directly related to the motor vehicle and protects the purchaser” if the vehicle is a total loss. The court similarly found that processing fees and prepaid interest are also “directly related” to a vehicle purchase.

Additionally, the court addressed the scope of the current version of “question 2” in the DoD’s interpretative rules. The plaintiff argued that the interpretative rule should be applied to motor vehicle loans even though the guidance only references the personal property exception. The court disagreed:

“Plaintiff argues that the 2016 Q&A Interpretation for personal property should apply to the motor vehicle exception and that the Court should find that these three charges were not expressly intended to finance the purchase of the motor vehicle. That argument is unpersuasive. The 2016 Q&A Interpretation only applied to personal property and did not address motor vehicles…”

As a result, the court granted the defendant’s motion to dismiss the lawsuit.

So, what does this mean for credit unions? First, the plaintiffs could appeal the decision to a federal appellate court and perhaps have this decision overturned. Second, this is just one federal district court, so this opinion is of limited authority outside of its jurisdiction in Virginia. However, the opinion could be persuasive to other courts that may consider similar claims in the future so overall it is a positive outcome that the court was not persuaded to cross-apply guidance for the MLA’s personal property purchase loan exception to the motor vehicle purchase loan exception.