Active Military: Gap Insurance Denial

In 2017, the US Department of Defense (DoD) issued new guidance on the Military Lending Act (MLA), which was enacted in 2006 to protect active-duty military members and their families from predatory lending practices. This new interpretation blocked military members from purchasing Guaranteed Asset Protection (GAP) insurance from dealerships, leaving some service members exposed to significant financial risk in the event of a total loss of their vehicles. GAP insurance covers the difference between the actual value of a vehicle and the loan balance, which can be substantial due to quick depreciation. While the MLA was intended to protect service members, this specific interpretation has created confusion and financial distress for those who are no longer able to access GAP insurance through dealerships.

A 2017 interpretation of the Military Lending Act (MLA) blocked military members from buying GAP insurance from dealerships

In December 2017, the Department of Defense (DoD) issued new guidance on the Military Lending Act (MLA), which was enacted by Congress in 2006 to protect active-duty military members, their spouses, and dependents from predatory lending practices. The 2017 interpretation of the MLA blocked military members from buying Guaranteed Auto Protection (GAP) insurance from dealerships.

GAP insurance covers the difference between the actual value of a vehicle and the loan balance if the vehicle is totaled or stolen. Due to the quick depreciation of vehicles, the value is often less than the loan balance. Before the 2017 interpretation, dealerships could offer GAP insurance as part of the vehicle loan. However, under the new guidance, any loan made to an active-duty service member that includes GAP insurance must comply with the MLA's requirements, including a 36% Military Annual Percentage Rate (MAPR) mandate.

The 2017 interpretation caused confusion and concern in the automotive industry, as dealerships were unsure how to comply with the new requirements. Most dealerships stopped offering GAP insurance to service members to avoid falling under the MLA requirements. This left some service members in financial distress, as they were no longer able to protect themselves from incurring significant debt in the event of a total loss.

The National Automobile Dealers Association (NADA) and other industry groups urged the DoD to reconsider, arguing that the GAP waiver dealerships offer is more comprehensive than GAP insurance offered by insurance companies. In February 2020, the DoD amended its interpretive rule for the MLA and repealed the 2017 guidance, restoring service members' access to GAP waivers.

Dealerships often roll the cost of GAP insurance into the overall vehicle loan

Dealerships often roll the cost of Guaranteed Auto Protection (GAP) insurance into the overall vehicle loan. This additional cost is usually financed as part of the loan for the vehicle. This practice is common because dealerships want to maximise their profits. However, this convenience comes at a cost, as borrowers end up paying interest on the GAP insurance portion of the loan. Moreover, borrowers lose the flexibility to cancel the GAP insurance policy since it is tied to the loan. As a result, they may end up paying for GAP insurance even after it becomes unnecessary.

The cost of GAP insurance from dealerships is significantly higher than that offered by insurance companies. On average, dealerships charge up to $600 for GAP insurance, while insurance companies charge around $61 per year. This price difference exists because dealerships have more leverage when selling GAP insurance to customers on the spot.

In the United States, the Military Lending Act (MLA) was enacted in 2006 to protect active-duty service members, their spouses, and dependents from predatory lending practices. The act limits the Military Annual Percentage Rate (MAPR) to 36%. This rate includes charges for "interest, fees, and charges imposed for credit insurance, debt cancellation and suspension, and other credit-related ancillary products".

In December 2017, the Department of Defense (DoD) issued new guidance on the MLA. This guidance stated that if "credit-related costs" are financed as part of a vehicle loan, the loan is subject to the requirements of the MLA. This interpretation caused confusion in the automotive industry, as it was unclear whether GAP insurance qualified as a "credit-related cost".

To comply with the MLA, most dealerships stopped offering GAP insurance to active-duty service members. This decision left some service members in financial distress, as they were no longer able to protect themselves from owing thousands of dollars in the event of a total loss.

The MLA's interpretation of "credit-related costs" has created a challenge for dealerships. They must now decide whether to stop offering GAP insurance altogether or only to non-military customers. Stopping the practice of rolling GAP insurance into vehicle loans would result in reduced profitability for dealerships. On the other hand, limiting GAP insurance offerings to non-military customers could be considered discriminatory and raise fair lending practice concerns.

The MLA states that the Military Annual Percentage Rate (MAPR) may not exceed 36%

The Military Lending Act (MLA) was enacted by Congress in 2006 and implemented by the Department of Defense (DoD) in 2007. The MLA was created to protect active-duty service members, their spouses, and dependents from predatory lending practices.

The Act established new limitations and disclosure requirements for transactions involving the extension of consumer credit. The MLA broadly defines charges as "interest, fees, and charges imposed for credit insurance, debt cancellation and suspension, and other credit-related ancillary products sold in connection with the transaction."

Under the Act, the total charges are expressed through an annualised rate referred to as the Military Annual Percentage Rate (MAPR), which may not exceed 36 percent. This rate includes charges that may not be included in the finance charge or the annual percentage rate (APR) disclosed under the Truth in Lending Act (TILA).

The MLA provides an optional safe harbour from liability for certain procedures that creditors may use in connection with identifying covered borrowers. It also requires creditors to provide written and oral disclosures in addition to those mandated by TILA.

The MAPR of 36% is calculated in accordance with 32 CFR §232.4(c) and is a limit mandated by 32 CFR §232.4(b). This rate largely parallels the APR, as calculated in accordance with Regulation Z, but with some exceptions to ensure that creditors do not have incentives to evade the interest rate cap. While late payment fees and taxes are excluded from both the APR and the MAPR, certain fees more directly related to the cost of credit are typically included in the MAPR but not the APR. Examples of these include application and participation fees.

The MLA was designed to protect service members from predatory lending practices

The Military Lending Act (MLA) is a federal law designed to protect active-duty service members and their families from predatory lending practices. It establishes important regulations for various credit products, including payday loans, vehicle title loans, and traditional overdraft services. The MLA was enacted by Congress in 2006 and implemented by the Department of Defense (DoD) in 2007. The Act established new limitations and disclosure requirements for transactions involving the extension of consumer credit as defined under Regulation Z of the Truth in Lending Act (TILA).

The MLA's protective measures encompass a range of credit products that service members may encounter. These include payday loans, vehicle title loans, traditional overdraft services, and certain lending practices associated with credit cards, residential mortgages, and home equity loans. The MLA also includes certain consumer loans that fall under its purview, such as refund anticipation loans, certain installment loans, and certain student loans.

One of the key benefits offered by the MLA is the interest rate cap, which places a limit on the annual percentage rate (APR) on certain loans to 36%. This includes interest, fees, and other charges associated with the loan. The MLA also prohibits mandatory arbitration, meaning that lenders cannot require service members to submit to arbitration on a dispute related to a covered loan. Additionally, the MLA disallows prepayment penalties, allowing service members to pay off their debts early without incurring additional charges.

The MLA also provides protections for service members beyond those related to lending practices. For example, it safeguards service members' rights when it comes to residential leases, ensuring that they and their dependents cannot be evicted without a court order. The MLA also allows service members to request a temporary stay or postponement of certain civil proceedings, such as foreclosures or bankruptcy proceedings.

In summary, the MLA is a comprehensive federal law that aims to protect service members and their families from predatory lending practices. By imposing restrictions on interest rates, fees, and certain lending practices, the MLA promotes fair treatment and financial stability for those serving in the military.

Some service members have been negatively affected by the MLA interpretation, facing financial distress as a result

The Military Lending Act (MLA) was enacted by Congress in 2006 and implemented by the Department of Defense (DoD) in 2007 to protect active-duty military members, their spouses, and dependents from predatory lending practices. While the MLA was designed to protect service members, a December 2017 interpretation of the act has negatively impacted some individuals, resulting in financial distress.

The 2017 interpretation blocked military members from purchasing Guaranteed Asset Protection (GAP) insurance from dealerships. GAP insurance covers the difference between the actual value of a vehicle and the loan balance if the vehicle is totaled or stolen. Due to the quick depreciation of vehicles, the actual value is often less than the loan balance, leaving service members with a significant financial burden.

As a result of the MLA interpretation, most dealerships no longer offer GAP insurance to service members, and most lenders are unable to finance it. This has left some service members with substantial out-of-pocket expenses when their vehicles are totaled. For example, one Marine based in North Carolina was unable to purchase GAP insurance for his 2016 Chevy Camaro 2SS through a dealership due to the MLA interpretation. Unfortunately, he later crashed the vehicle and was left with a $4,000 debt after his insurance company declared it a total loss. This debt has impacted his ability to obtain another auto loan, causing financial strain.

Another example involves a Marine stationed at Camp Lejeune in Jacksonville, NC, who was confused and frustrated to learn that he couldn't buy GAP insurance through the dealership. He had relied on dealership-provided GAP insurance in the past and felt that the MLA interpretation was harmful and absurd, especially since it affected his finances and those of other service members.

These cases illustrate how some service members have been negatively affected by the MLA interpretation, facing financial distress due to the unavailability of GAP insurance. This has led to calls for the Department of Defense to reconsider its interpretation of the MLA and find a solution that protects service members without causing unnecessary financial burden.

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