Until December 2017, the auto industry operated under the understanding that the federal Military Lending Act's (MLA) exclusion from coverage for credit transactions "expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased," extended to essentially all auto financing transactions. In other words, dealers thought that they didn't have to worry about complying with the MLA. However, the Department of Defense (DOD) turned that understanding upside down when it announced that financing "credit-related costs" mean that the transaction would be covered by the MLA.

According to the DOD, if a purchase-money transaction also finances "credit-related costs"-such as Guaranteed Auto Protection insurance and credit insurance premiums-then creditors must identify covered borrowers, provide required disclosures, calculate the Military Annual Percentage Rate of the transaction, and otherwise comply with the MLA's consumer protections. By contrast, if the transaction only finances "costs related to the object securing the credit" such as leather seats, extended warranties, and even negative equity-then it is not covered by the MLA.

Originally published in Tennessee Dealer News, Sept/Oct 2019.