AFSA opposes proposed changes to military lending

A legislative effort underway to expand and toughen the Military Lending Act, which regulates loans to military service members on active duty, is drawing pushback from a lender trade group.

Sen. Bill Nelson, a Florida Democrat, introduced legislation last week. Dubbed the "Military Lending Act Improvement Act of 2018," the bill would extend coverage of the Military Lending Act to veterans for one year after discharge and also would lower the maximum annual percentage rate that can be charged to military members to 24 percent, from 36 percent currently.

"AFSA opposes this legislation," Bill Himpler, executive vice president of the Washington-based American Financial Services Association, told Automotive News. AFSA members include many of the largest auto lenders.

The so-called military annual percentage rate is an all-in figure that includes fees and other one-time charges as if they were being financed on an annual basis. That has the effect of inflating the rate, especially for extremely short-term loans, experts say.

The new bill is one of several fronts where the Military Lending Act is drawing the attention of the auto finance industry.

In another prominent development, the Bureau of Consumer Financial Protection's oversight of military lending has come into question.

A bureau spokesman said the agency is reviewing areas where it may have overstepped its authority, including whether it is properly exercising its authority with regard to the Military Lending Act.

An Aug. 10 article in The New York Times suggested that Mick Mulvaney, the bureau's interim director, is looking to "weaken oversight of military lending." Routine examinations of lenders for violations of the Military Lending Act could be suspended, the newspaper reported.

John Czwartacki, the spokesman quoted in the article, told Automotive News in an Aug. 13 email: "Under new leadership, the bureau has engaged in a comprehensive review of its activities and is assessing whether those activities align with its statutory authority. MLA is one authority, among many, that the bureau has examined."

He said, "The bureau expects to convey its findings to Congress and to seek legislative clarity where warranted."

Nelson announced his proposal on Aug. 7. In addition to extending coverage to veterans and lowering the maximum military APR, the bill also would prohibit the use of starter-interrupt devices for military members.

Some subprime lenders and many buy-here, pay-here dealerships use those GPS-equipped devices for the biggest credit risk customers to compel timely payments and pinpoint the location of vehicles in the event they are to be repossessed. When a payment is late, the device can make it impossible to restart a vehicle once it's been turned off.

The proposal would also prohibit bill collectors from contacting a service member's commanding officer in an effort to locate the military member or to threaten the borrower with military discipline if they fail to pay.

Lawyer Tony Kaye, a partner with Ballard Spahr in Salt Lake City, said Nelson originally introduced the proposal this year as an amendment to the National Defense Authorization Act, then reissued it last week as a separate piece of legislation.

"It did not get bipartisan support before," Kaye told Automotive News in a phone interview Aug. 13. "I don't think this is going to be passed. But if it did, it would curtail a lot of lending to military members."

The proposed legislation could affect another controversy.

In December 2017, the Department of Defense issued a new interpretation of the Military Lending Act. It applies the restrictions of the act to auto loans if additional products such as guaranteed asset protection are added.

Previously most auto loans were routinely exempt from the act. To avoid having the act apply to auto loans, many dealers have stopped selling GAP to military members, even though GAP was a reliable profit center and offered some real customer benefits. AFSA and the National Automobile Dealers Association have lobbied to get the Defense Department to withdraw the interpretation.

Meanwhile, Nelson's proposal would extend the restrictions of the Military Lending Act to all auto loans — even those that don't include GAP.