Courts Issue Decisions on Military Lending Act 

By Erica A.N. Kramer* July 08, 2021
Military personal are often eligible for special loans and discounts on car purchases. Military personal are often eligible for special loans and discounts on car purchases.

In the last two months, federal courts in Virginia and Florida have rendered decisions in two cases of particular interest to auto dealers, as those decisions address the applicability of the Military Lending Act to motor vehicle retail installment transactions that include financing for ancillary products, such as GAP.

The MLA excludes certain transactions that do not qualify as “consumer credit,” including any “credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased” and any “credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.” In 2016, the Department of Defense (DoD) issued an interpretation of the MLA exclusion for financing the purchase of personal property, stating that credit a creditor extends to purchase personal property that secures the credit is not exempt from the MLA’s definition of “consumer credit” if the creditor simultaneously extends credit in an amount greater than the purchase price and provides the buyer with cash-out financing.

In 2017, the DoD issued a similar interpretation of the MLA exclusion for financing the purchase of a motor vehicle where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle being purchased. That interpretation, commonly referred to as “Q&A #2,” stated that whether such a transaction is exempt from the MLA’s definition of “consumer credit” depends on what the credit beyond the purchase price is being used to finance. If the credit is used to finance a product or service expressly related to the vehicle, such as leather seats or an extended warranty, then the transaction is still covered by the exception and is not subject to the MLA. If, however, the credit is used to finance a credit-related product or service, such as GAP or credit insurance, then the transaction would not be covered by the exception and would be subject to the MLA.

Further complicating the issue is the fact that the MLA separately prohibits creditors from securing consumer credit transactions with covered borrowers with a motor vehicle title. Therefore, dealers were thrust into a Catch-22 in which vehicle financing transactions that also financed credit-related products or services were deemed covered by the MLA. But there was no way for dealers to comply with the requirements of the MLA unless the transaction was unsecured—an impractical solution, at best. After significant industry efforts to educate the DoD on the difficulties created and the resulting chilling effect experienced by covered servicemembers, the DoD withdrew the 2017 interpretation in 2020. In doing so, the DoD stated that it planned to study the issue further and that it was not taking any “position on any of the arguments or assertions advanced as a basis for withdrawing the amended Q&A #2 from the December 14, 2017 Interpretive Rule.”

In Davidson v. United Auto Credit Corporation, the U.S. District Court for the Eastern District of Virginia recently had the opportunity to address the issue and held that a motor vehicle retail installment transaction was excluded from coverage under the MLA, even though it also financed GAP, a processing fee, and prepaid interest. In that case, Jerry Davidson, an active member of the U.S. military, entered into a retail installment contract with United Auto Credit Corporation in connection with his purchase of a 2011 GMC Acadia SUV. Davidson sued United Auto, claiming that it violated the MLA by failing to disclose various fees, failing to disclose the true cost of credit, and requiring him to submit claims to arbitration. United Auto moved to dismiss the complaint, and the court granted the motion.

Davidson argued that, despite the withdrawal of Q&A #2, his RIC was subject to, and violated, the MLA because it included GAP coverage, a processing fee, and prepaid interest, none of which were related to the vehicle he purchased. United Auto argued that accepting this argument would amount to a reinstatement of the DoD’s 2017 interpretation. The court agreed with United Auto and added that even if the 2016 interpretation concerning personal property, which was not withdrawn, applied to motor vehicles, the GAP coverage, processing fee, and prepaid interest included in Davidson’s RIC were not “unrelated to the purchase of the motor vehicle; rather, they [were] inextricably tied to [his] purchase of the vehicle.”

In a similar case, Juarez v. Drivetime Car Sales Company, LLC, the U.S. District Court for the Middle District of Florida recently ruled that even though a motor vehicle retail installment transaction also included financing for a GPS system and GAP coverage, it was excluded from the scope of the MLA. Therefore, the plaintiff could be compelled to arbitrate his dispute with the dealer. In that case, Ramon Juarez, an active member of the U.S. military, entered into a RIC with Drivetime Car Sales Company, LLC, in connection with his purchase of a used vehicle. The RIC financed the purchase of the vehicle as well as add-on items, such as a GPS system and GAP coverage. The RIC also included an arbitration provision. Juarez sued Drivetime, and Drivetime moved to compel arbitration. The magistrate judge recommended that the motion to compel arbitration be granted, and Juarez objected, arguing that the bundling of the GPS system and GAP coverage in the RIC removed his credit transaction from the MLA’s exemption and, therefore, that the MLA prevented Drivetime from compelling arbitration.

The court agreed with the magistrate judge and adopted his recommendation to enforce the arbitration provision, finding that the RIC specifically stated that it was intended to finance the vehicle and that the majority of the financed amount in the RIC was attributable to the vehicle price. Moreover, “[a]ll of the additional items bundled into the [RIC], apart from the vehicle, were only purchased because the vehicle was purchased. Without the vehicle’s purchase, the other items would not have been purchased. The vehicle is at [the] epicenter of the transaction while the costs for items such as a GPS are ancillary and specifically tied to the vehicle. The presence of the other add-on items does not alter the [RIC’s] express purpose, i.e., the purchase of the vehicle.” Accordingly, the court concluded that Juarez’s RIC was exempt from the definition of “consumer credit” in the MLA and that, therefore, Drivetime could enforce the arbitration provision in the RIC.

The Davidson and Juarez decisions provide welcome clarity to auto dealers concerning the applicability of the MLA to vehicle retail installment transactions that include financing for ancillary products. However, we caution that further developments are still likely forthcoming. As of the date of this article, both cases have been appealed—Davidson to the Fourth Circuit and Juarez to the Eleventh Circuit. In addition, of course, the DoD could reconsider the issue and publish further guidance or interpretations, though there have not yet been any indicators that it plans to do so. However, dealers should remain aware of the risks presented by the MLA and its potential applicability to motor vehicle retail installment transactions. 

 

*Erica A.N. Kramer is a partner in the Tennessee office of Hudson Cook, LLP.

 

© CounselorLibrary.com 2021, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only to Used Car News.

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Last modified on Thursday, 08 July 2021 17:14