The Department of Defense's latest interpretation of the Military Lending Act, published last month, includes a murky set of rules that could retroactively put dealers and lenders in regulatory jeopardy, attorneys, compliance experts and industry trade associations say.
For now, industry leaders suggest that dealers consult their legal counsels, but sources are hopeful that the Defense Department soon will adjust the guidance.
The Military Lending Act was designed to protect active duty service members and their dependents in credit transactions. The protections include certain disclosures, arbitration provisions and a 36 percent interest rate cap on a finance agreement combined with ancillary and credit products.
Until now, motor vehicle finance transactions were believed to be exempt from the act. Only auto title loans had to comply with it.
Under the latest interpretation, if a vehicle finance contract for active military members or their dependents includes financing for credit-related products or services, such as guaranteed asset protection or other types of credit insurance, or provides cash-out financing, the creditor, which would be the dealership or lender, must comply with the act. Although the interpretation was published in December, the Defense Department says it has been in effect since the rule was amended Oct. 3, 2016. (Through cash-out financing, an uncommon practice at franchised dealerships, a customer can finance a product plus an amount in cash. For example, a customer could finance a $10,000 item plus $2,000 in cash. The customer would pay interest and other finance charges on the $12,000 principal.)