In a significant victory for servicemembers and their families, who will again have access to products designed to protect them in the event of a total vehicle loss, the Department of Defense has revised its guidance that previously prevented auto lenders from offering service members Guaranteed Asset Protection (GAP) waivers in connection with a vehicle purchase. The repeal is also a victory for the auto vehicle finance industry itself, which will benefit from clearer and more predictable guidance related to the Military Lending Act (MLA). This change is the result of a joint effort by the American Financial Services Association (AFSA) and the National Automobile Dealers Association (NADA).
On February 27, 2020, the Department of Defense amended its interpretive rule for the MLA to repeal previous guidance from 2017 that held vehicle GAP waiver plans, along with other credit-related products, were not exempt from the MLA, denying servicemembers and their families access to those products.
The previous guidance took the form of an amendment to the Department of Defense’s interpretation of the MLA related to, among other things, vehicle extended warranty plans in guidance termed as Question and Answer 2 (QA2). Specifically, QA2 asked whether credit that a creditor extends for the purpose of purchasing a motor vehicle or personal property, which secures the credit, falls within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle. The Department of Defense, in its 2017 guidance, stated that the answer “depend[s] on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance.” Under this guidance, “financing costs related to the object securing the credit” will fall within an MLA exception. However, financing for “credit related costs” would not be excepted. And per QA2, “credit related costs” include “a credit transaction that includes financing for [GAP] insurance or a credit insurance premium would not qualify for the exception under §232.3(f)(2)(ii) or (iii).”
The practical effect of QA2 was to deny servicemembers the opportunity to purchase GAP waiver policies, leaving them and their families exposed to unnecessary financial risk in the event their automobile suffered a total loss. Recognizing that QA2 would ultimately harm the very people it sought to protect, AFSA and NADA engaged in a joint effort to persuade the Department of Defense to remove this interpretation.
In January 2018, AFSA and NADA issued a joint letter to the Department of Defense requesting an immediate withdrawal of QA2. The letter informed the Department of Defense that its 2017 interpretation impermissibly narrowed the scope of the statutory motor vehicle financing exclusion, and significantly undermined servicemember readiness by effectively foreclosing active duty servicemembers and dependents access to the full range of protections provided by GAP waiver coverage and other credit-related products.
The letter also illustrated the damaging effects the new interpretive guidance caused to this market segment by drawing special attention to the fact that the guidance was making automobile lending to servicemembers particularly difficult. According to AFSA and NADA, QA2 was “drying up the availability of these products to covered members (and in some cases all consumers) overnight” and “creat[ing] . . . massive turmoil in the marketplace among companies that provide, retail, and finance these products.”
AFSA and NADA’s efforts paid off. In issuing its revised guidance the Department of Defense suggested that it is open to hearing from all stakeholders, noting that its decision to withdraw QA2 was driven by the fact that it “[found] merit in [the] concern [raised by ASFA and NADA]” that “creditors would be unable to technically comply with the MLA if the purchase included products not expressly related to the purchase of the vehicle[,]” such as GAP waivers.
As mentioned above, the elimination of QA2 is an unambiguous victory for both borrowers and lenders. However, the Department of Defense’s reversal also illustrates that a concerted effort by stakeholders to inform agencies of the unintended harms posed by certain regulations, and to persuade agencies to make helpful policy changes, often pays off. This is especially true where, as here, the agency demonstrates a willingness to approach problems with an open mind.