A tussle over GAP for military members

A change to the Military Lending Act, designed to protect service members, has instead left some in financial distress. And it has dealers, particularly those near military bases, wrestling with how to comply with the law.

A December 2017 interpretation of the act has blocked military members from buying from dealerships an aftermarket product that could save them from owing thousands of dollars if their vehicles are totaled.

While auto insurance covers the actual value of the vehicles, the quick depreciation of vehicles means the value is often less than a loan balance. Guaranteed asset protection — or GAP — covers the difference.

But to comply with the MLA, most dealerships no longer offer service members GAP, and most lenders haven't been able to finance it.

One unnamed lender told the National Automobile Dealers Association that it has seen 117 total losses among its military customers in the nearly 15 months since the Department of Defense issued the new guidance. The average balance on those loans was $16,000; without GAP, those customers owed on average about $3,000 out of pocket.

NADA, the American Financial Services Association and other industry groups have been urging the department to reconsider for more than a year. They are now turning up the pressure. Some dealers report losing finance-and-insurance revenue in the wake of the change. And NADA says the MLA interpretation exposed about 5,000 service members to about $15 million in liability from total losses in 2018.

"This really is a ticking time bomb," Charlie Gilchrist, chairman of NADA and president of Gilchrist Automotive in Texas, told Automotive News. "We have to get it handled."

Before December 2017, vehicle finance transactions were believed to be exempt from the act. But the new interpretation said if a vehicle finance contract for active service members or their dependents includes GAP and other credit-related products, the dealership and the indirect lender — which arranges consumer vehicle financing through the dealership — must comply with the act. Products such as service contracts, because they are related to the vehicle itself and are not considered credit related, remain exempt.The Defense Department did not respond to a request for comment last month, but some consumer groups support the updated MLA interpretation saying that GAP insurance is available to service members for a lower price from nondealership providers. Dealers and industry groups argue that the GAP waiver dealerships offer is more comprehensive than GAP insurance.

For a Marine based at Camp Lejeune in Jacksonville, N.C., the change meant GAP was off the table as a dealership option when he visited nearby Marine Chevrolet-Cadillac last March. The Marine, who asked not to be named, was confused to learn he couldn't buy GAP through the dealership.

"I view GAP as no different than having auto insurance," he said. In past vehicle purchases, the Marine and his family members had always bought dealership-provided GAP for about $250. "It saves you in the long run."

But he went ahead with a purchase, buying a 2016 Chevy Camaro 2SS without GAP coverage. Nine months later, while driving down the highway on a rainy day, he hydroplaned at 70 mph, crashing into a guard rail. The Marine, 22, now must figure out how to pay the $4,000 he still owes on the loan after his insurance company declared the Camaro a total loss and paid him for its value. It's a steep debt for a service member making $22,000 per year.

The Marine can't get approved for another auto loan until he pays the $4,000. For now, he and his wife are sharing her vehicle.

"This Military Lending Act has done more harm than any good. Not being able to purchase GAP — that is the most absurd of them all," he said. "Not only does it hurt me, I'm pretty sure it's hurt plenty of other service members."

The Marine is just one example of a service member negatively affected by the MLA interpretation, according to dealers and lenders.

Alycia Kellum, executive manager at Don Williamson Nissan, also in Jacksonville, N.C., said she sold cars to at least five service members last year who ended up totaling their vehicles and didn't have GAP.

"These guys just don't deserve to have that choice [taken] away from them, especially when it's one product that protects them at a reasonable cost," Kellum said. "That affects them every day, every month, their household, their income."

Bill Himpler, president-elect of the American Financial Services Association, which represents lenders, said the White House is paying attention to the controversy. Still, "you do have a lot of changing personnel at the White House, at [the Office of Management and Budget] and at the Pentagon that has kind of complicated things," he said.

At one point, it was widely thought the Defense Department would release an amended interpretation in May 2018. But more than a year after the interpretation was published, nothing has changed.

Don Hall, CEO of the Virginia Automobile Dealers Association and a former Marine, said he is "outraged" the situation is lingering.

"What we have now are a bunch of bureaucrats who have made this decision on behalf of the military," Hall said. "Those bureaucrats make a lot of money comparatively speaking, and the military do not and have the most exposure."

Under the old rules, military members could choose to forgo GAP, he said, but "the idea that they can't even get it makes no sense."

In October, NADA sent a letter arguing its case to William Castle, principal deputy general counsel for the Defense Department. The department acknowledged receipt of the letter but offered no other response, NADA said. On Feb. 6, NADA sent another letter, outlining the impact on service members with case studies and data from the unnamed indirect auto lender.

"Since the submission of our October 2018 letter, the risks that we identified have, unfortunately, matured into quantifiable injury to service members," Paul Metrey, NADA's vice president of regulatory affairs, wrote in the letter. He cited market data asserting that the MLA interpretation exposed about 5,000 military members to about $15 million in liability from total vehicle losses last year.

"We renew our request that DOD immediately withdraw [the December 2017 interpretation] to restore to service members the opportunity to protect themselves from incurring significant, unexpected, and unnecessary liability that threatens their military readiness," Metrey wrote.

In North Carolina, dealerships sell 75 vehicles to military members and their dependents per day, estimated Bob Glaser, CEO of the North Carolina Automobile Dealers Association. Last September, Hurricane Florence damaged or destroyed 20,000 vehicles in the state. Any military members who bought those cars and trucks earlier in 2018 wouldn't have had the chance to buy GAP through the dealership.

"It's actually very horrible from a policy point of view on what we're doing to servicemen and women," Glaser said. "It's so unfair that you don't allow a military member who's serving the country — you don't allow him to protect probably the largest financial asset he's purchased to date."

Affected service members could end up struggling with resulting debt "for years to come," he said.

But groups in support of the MLA interpretation, such as the Center for Responsible Lending, say that protection is still available, noting that insurance companies offer GAP for $20 to $30 per year.

"Auto dealers have been found to use their leverage with customers to push them to, on the spot, purchase a plan for hundreds or more than a thousand dollars annually," the Center for Responsible Lending said in an August statement. The Center for Responsible Lending did not respond to Automotive News' request for comment last month.
While pricing of the dealership-offered GAP product is indeed higher — averaging about $500 over the life of a customer's loan, according to NADA — dealers argue their coverage is more robust.

A GAP waiver, offered by dealerships through indirect lenders, differs from the GAP insurance offered by insurance companies. A GAP waiver covers negative equity on a trade-in that may have been rolled into the deal, as well as the deductible on the claim, while GAP insurance does not, according to Matt Nowels, a lawyer at the Meenan law firm in Tallahassee, Fla., who specializes in GAP and other finance-and-insurance products.

Plus, not all vehicle insurers even offer GAP insurance, including three of the top 10 auto insurance carriers, according to the February NADA letter, which cites personal finance website NerdWallet on the point. Two of the seven offering it make it available only if the auto loan is from the carrier's lending affiliate, according to the letter. Meanwhile, virtually all dealerships offer GAP waivers.

The Defense Department hasn't prohibited indirect lenders from financing GAP, but MLA provisions make it infeasible for those lenders. The act limits nondepository institutions, such as dealerships, from having a security interest in the title of the vehicle being financed. But if the dealership doesn't take a security interest, the lender can't obtain the collateral — the vehicle — in a default situation. The dealership would be sending the lender unsecured paper, which is why most — if not all — indirect lenders no longer finance GAP for service members and their dependents.

Banks and credit unions that act as direct lenders are considered depository institutions, so they comply with MLA even if they sell GAP.

Because of that distinction, some dealerships have lost business to local credit unions.

"Some customers will come in and won't purchase a vehicle because if they can't buy GAP, they won't buy a car," dealership manager Kellum said.

GAP sales at Kellum's store, with a customer base that's 70 percent military and dependents, have plunged to 48 percent of deals, down from 71 percent in 2017. Many customers now rely on credit unions not only for GAP, but also for the auto loan. Their thinking: Why finance GAP with one lender and the vehicle with another? The change is costing Don Williamson Nissan an average of $50,000 in gross profit per month, Kellum said.

Most North Carolina dealerships are following federal law by selling GAP to civilians but not service members.

But some retailers in the state no longer sell GAP to civilians because they fear repercussions for violating a state anti-discrimination law saying dealerships must make the same offers to military members that they make to others. One large North Carolina dealership group no longer sells GAP to any customers. The group, which asked not to be named, says it is losing $100,000 per month on average because of that decision.

North Carolina isn't the only state with laws that compound the problem for dealers. NADA officials told Automotive News they have heard of at least a dozen other states with similar anti-discrimination laws.

And a 2001 Louisiana law requires dealerships to offer GAP to every customer. That coverage helped consumers when Hurricane Katrina hit New Orleans in 2005 and Baton Rouge suffered heavy flooding in 2016, resulting in an "overwhelming" number of GAP claims, said Will Green, president of the Louisiana Automobile Dealers Association.

"Imagine our shock and our frustration when this interpretation comes down in federal law that now basically puts us in a Catch-22 where the dealers here in Louisiana ... we essentially cannot offer it [to service members and dependents], especially when it is deemed such a valuable product," Green said.

The Louisiana association has told members that federal law trumps state law and encourages dealers to consult their lawyers to weigh options. It also is working with NADA to urge the Defense Department to rethink what Green calls a "misguided" interpretation. The state association is collecting service member examples to show the Pentagon the value of dealership-provided GAP.

"We hope our Catch-22 coupled with stories across the country of this being an issue will only help prop up the facts and the figures that NADA now has," Green said. "I think once [the Defense Department] sees these figures and hears the story, they'll understand that this does need to be unwound."

While California doesn't have a compounding state law, the California New Car Dealers Association has advised members to refrain from offering GAP to service members.

"Don't worry about whether the particular lending institution is going to accept it," Brian Maas, president of the California association, tells dealers. "Protect yourself and don't offer it."

"Our fingers and toes are crossed that this changes soon," Maas added. "It's very frustrating for all the dealers and their customers that this rule is still in effect."

As long as the MLA interpretation stands, service members who total their vehicles after being denied GAP coverage through dealerships will suffer, say dealers and some military members.

Lawmakers are not "the ones that are going to hurt from this," said the Marine in North Carolina who totaled his Camaro. "It's a slap in my face as a combat veteran that I go overseas and I serve this country and I risk my life. I'm fed up."