As you have probably heard by now, the Military Lending Act (MLA) applies to auto dealers who sell GAP insurance and credit life insurance. We have prepared a Military Lending Policy for some of our clients and we are now making it available to all of our clients and readers. The MLA is not new, but the regulations interpreting it are new. The MLA is designed to protect anyone who is in the military and is called up for active duty for more than 30 days, as well as National Guard and Reserve members. The general belief was that it did not apply to auto dealers, until the Department of Defense (DOD) issued its recent interpretation stating that it does apply to auto dealers in certain circumstances.
Many people are up in arms about the new DOD regulations because they are essentially saying the law always applied to auto dealers, and if you have violated it by not providing necessary disclosures to your active duty military customer or by exceeding the maximum interest rate of 36% (including many fees and expenses) then the contract is void (not voidable – just void). It also imposes a whole host of other penalties including possible jail time for offenders.
State Law
Some California attorneys have suggested that the solution to dealing with the new regulations is to deny GAP insurance or credit life insurance to anyone who is active military, since these are the products that pull dealers into the MLA compliance requirements. The problem with the advice is that if you market or extend GAP or credit insurance to those covered by the MLA (which could be evidenced by those you already sold to), it would violate California law to discriminate.
The state law prohibits discrimination against the military, but excludes those covered by the MLA from the prohibition under certain circumstances. It says in part:
“With respect to any loan or credit transaction covered [by the MLA] a person that does not market or extend those transactions to covered borrowers shall not be in violation of this section.” (CA Military & Veterans Code Section 394(f))
Some California attorneys feel that the state statute provides enough ammunition to fight an alleged violation based on a discrimination claim, and that it is better to discriminate in California and not sell GAP or credit insurance products to active military customers, than to attempt to comply with the MLA.
Federal Law
However, discriminating may violate not only California law for the reasons stated above, but also federal law, under the MLA’s preemption language (32 CFR 232.7). The MLA says that federal law preempts the state law (meaning federal law applies if they conflict) but not with respect to greater protections provided by state law. Federal law also says the states cannot “permit the violation or waiver of any State consumer lending protection covering consumer credit that is for the benefit of residents of the State on the basis of the covered borrower’s nonresident or military status, regardless of the covered borrower’s domicile or permanent home of record, provided that the protection would otherwise apply to the covered borrower.”
In short, this seems to be saying two things: 1) If someone falls under the MLA and the state provides greater consumer lending protection than the MLA, which California does by saying a lender cannot discriminate, then the same protection must be provided to those covered by the MLA even if they are not residents of the State, and 2) If someone would be covered by the state protection if they were a state resident, (and they would if they are in the military), then they cannot be EXCLUDED from the coverage just because they are an out of state resident or because of their military status, i.e. active duty. The exclusion may not be valid. This presents a potential problem for those discriminating against active military in California.
Those recommending discrimination in California are interpreting the MLA to mean that because the state law does not apply to covered borrowers, there is no violation or waiver. The problem is that either interpretation could be adopted by a court.
The best solution is to comply. It is not that hard to do. The policy we have prepared gives several options for compliance, even under state law. If you choose to discriminate, be aware that you can’t offer or extend GAP or credit insurance, and even if you don’t offer or extend GAP or credit insurance, you may still be violating the MLA even if you are not violating state law.
If you wish to purchase our Military Lending Policy, which covers the MLA and the Soldiers’ and Sailors’ Civil Relief Act, you may do so by contacting Erin Tenner at:
