Compliance Blog

There is pending litigation in the Eastern District of Virginia, Davidson v. United Car Sales Company, LLC, that could have implications for Military Lending Act (MLA) risks depending on how it is decided. 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. Some past interpretative rules created some confusion about 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. In early 2020, the DoD rescinded that guidance, citing that creditors may be “unable to technically comply” if a vehicle purchase “included products not expressly related” to the purchase. 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. The plaintiff in the case 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 argues that a loan “that 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 This is similar to the position that the Department of Defense (DoD) took in late 2017 but then rescinded.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 motion to dismiss, in part, points to the DoD withdrawal of past guidance where DoD stated its reasoning was, in part because creditors may be “unable to technically comply” if a vehicle purchase “included products not expressly related” to the purchase.

The plaintiffs’ allege a few key MLA violations:

• MLA disclosures – Claims the lender was not providing MLA disclosures to covered borrowers such as the “boilerplate” Military Annual Percentage Rate (MAPR) disclosure. The complaint also alleges the MAPR provided was improperly calculated, although the MLA does not require a numeric disclosure of the MAPR, as set forth in section 232.6(c)(1).
• TILA disclosures – The MLA requires that disclosures required under the Truth in Lending Act (TILA) and Regulation Z are properly provided. Plaintiffs assert that some fees were not properly disclosed as required by Regulation Z, specifically a GAP fee, a processing fee and prepaid interest.
• Arbitration clauses – The MLA prohibits mandatory arbitration clauses. The suit alleges violations of the MLA because the loan agreements had an opt-out arbitration clause. The defendant’s response asserts that the opt-out makes the clause not mandatory.  Note, the DoD indicated in past guidance that lenders can use a “savings clause” in their agreements so that any terms that are not permissible under the MLA would not apply to MLA covered borrowers.

The court heard arguments on whether to dismiss the case on January 8, 2021 so an opinion may be issued in coming weeks. Should the court dismiss the case, these claims would not be decided on the merits and may remain open questions. The outcome of this case could have implications in terms of risks, NAFCU will keep members updated as it develops.  

Programming Note. NAFCU is closing at noon today and will be closed on Monday in observance of President’s Day. We will be back to blogging on Wednesday!

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