Compliance Blog

Feb 14, 2022
Categories: Consumer Lending

The Federal Government Argues to Expand Scope of Consumer Credit Under MLA

The Military Lending Act (MLA)’s car loan exception to the definition of consumer credit applies to a loan offered “for the express purpose of financing…[a] car or personal property.” The Department of Justice, Department of Defense, and the Consumer Financial Protection Bureau (Government) recently took the position a hybrid loan, consisting of an MLA-exempt loan and a non-exempt loan, falls under the MLA and outside the car loan exception.

In an amicus curiae brief (amicus brief) filed in the fourth circuit, the Government argues a district court wrongly decided a hybrid loan meets the MLA’s car loan exception. The case rises from a class action suit where the plaintiff, an active-duty service member, bought a GMC Arcadia with a loan. The loan financed the vehicle purchase and the GAP insurance with the plaintiff’s car securing both products. After allegations the loan violated the MLA, a district court subsequently ruled the plaintiff’s loan is not consumer credit and falls within the car loan exception, concluding the car and the GAP insurance are “inextricably tied to [the] plaintiff’s purchase of the vehicle” as GAP insurance is a “form of insurance directly related to the motor vehicle.”

The Government argues the congressional intent behind the MLA is not as broad as the district court’s own reading, reasoning Congress “could have easily drafted that exception to include loans offered for a purchase involving a car or personal property, rather than loans offered for “purchasing a car or other personal property.” The Government contends the car loan exception applies to loans provided for the “express purpose” of financing a car or personal property while arguing GAP insurance is a stand-alone financial product that is distinct and unrelated to a car’s purchase. The Government continues to claim this distinction, maintaining the “GAP coverage [only] addresses a particular financial risk associated with the payment of car loans” and provides no relation to the purchase, repair, or replacement of a car. The Government believes this makes the product “appreciably distinct from and unrelated” to the purchasing of a car and the bundling of “disparate products” with a car loan as a hybrid loan does not satisfy the car loan exception. The Government asks the court to apply the MLA’s consumer protections to the hybrid loan.

The Government also believes the court wrongly relies on the withdrawal of a 2017 Department of Defense (DOD) guidance, which outlined how GAP insurance is treated under the car loan exception, as proof the loan is not treated as consumer credit. The amicus brief refutes this position by highlighting language in the 2020 DOD guidance, which withdrew the 2017 DOD guidance, that indicates the DOD in withdrawing the 2017 DOD guidance has not taken a position on the merits of whether the hybrid loan is treated as consumer credit. Finally, the Government asks the court to preserve the DOD’s rule making ability to address GAP insurance in the event the court decides against the Government’s position.

NAFCU will continue to monitor the litigation for updates.

The Government’s amicus brief may be read here.

About the Author

Justin White, Regulatory Compliance Counsel, NAFCU

Justin White, NAFCU-Regulatory-Compliance-Counsel

Justin joined NAFCU as a regulatory compliance counsel in August 2021. As part of the Regulatory Compliance Team, he provides daily compliance assistance to member credit unions on a variety of topics.

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