On September 27, California Governor Gavin Newsom signed Senate Bill 1311, the Military and Veteran Consumer Protection Act of 2022 (the Act), into law. The Act takes direct aim at, among other things, the Military Lending Act’s (MLA) exceptions for loans obtained to purchase motor vehicles and other forms of personal property. It goes into effect on January 1, 2023.

To begin with, the Act will void a security interest in a motor vehicle if the security interest would cause a loan procured by a “covered borrower,” as defined in the MLA in the course of purchasing the motor vehicle, to be exempt from the MLA, and the loan also funds the purchase of a credit insurance product or credit-related ancillary product. For example, if an auto loan finances GAP insurance that California law deems to be “credit insurance” under California Insurance Code § 1758.992(d)(1), the Act will void the lender’s security interest. And by voiding that security interest, the loan will no longer be exempt from coverage under the MLA, which only exempts purchase money auto loans that are secured by the purchased vehicle. 10 U.S.C. § 1987 (i)(6) (“The term “consumer credit” … does not include a loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.”). Whether auto loan lenders may finance GAP waivers, GPS tracking systems, or other products that consumer advocates argue are credit-related is an open question. In any event, secured auto loans to covered borrowers that finance GAP insurance should comply with the MLA in all respects, including its 36% interest rate cap, oral and written disclosure obligations, and prohibition against arbitration agreements.

The Act is even more draconian with respect to loans taken by covered borrowers to purchase personal property other than vehicles. Specifically, the Act will void a security interest in personal property other than a motor vehicle, off-highway vehicle, trailer, or aircraft if the security interest would cause a loan procured by a covered borrower in connection with purchasing the personal property to be exempt from the MLA. As with auto loans, a security interest in the purchased personal property is required for the MLA exemption. But, in contrast to the new provision concerning auto loans, this provision is not triggered by financing credit insurance or credit-related ancillary products. It applies to any secured loan under which a covered borrower is financing the acquisition of personal property (other than motor vehicles, off-highway vehicles, trailers, or aircraft). In California, therefore, all secured personal property loans (as defined) to covered borrowers should be MLA compliant.

The Act also expands certain consumer protections afforded servicemembers under the Servicemembers Civil Relief Act (SCRA) and the California Military and Veterans Code (CMVC), including:

• The SCRA authorizes a servicemember to terminate a lease of a motor vehicle if the servicemember executes the lease while in a period of military service and then receives military orders for a change of permanent station from a location in the continental United States to a location outside the continental United States, or from a location in a state outside the continental United States to any location outside that state, or to deploy with a military unit, or as an individual in support of a military operation, for a period of not less than 180 days.

• The Act will instead authorize the termination of that lease if the servicemember receives military orders for a change of permanent station to a location that is more than 100 miles from the prior duty station, or to deploy with a military unit, or as an individual in support of a military operation, for a period of not less than 90 days.

• Existing California law authorizes a servicemember to petition a court to defer payments on an obligation or liability incurred by the servicemember before the effective date of his/her orders for military service. Deferred obligations are presently due upon the sale of the property or other event specified in the documents creating the obligation permitting the lender to accelerate the loan upon further encumbrance of the property, other than for preservation or protection of the property, or upon the maturity of the obligation.

• The Act amends current law so that obligations and liabilities deferred by court order are not due upon maturity of the obligations.

• Existing California law authorizes a member of the U.S. Military Reserve or the National Guard who is called to active duty to defer payments on specified obligations, including an obligation secured by a mortgage or deed of trust, while serving on active duty. No court order is required. A lender who defers payments on a closed-end credit obligation or an open-end credit obligation with a maturity date to extend the term of the obligation by the amount of months the obligation was deferred. Existing law makes any deferred mortgage payment payable upon the sale of the property or other event specified in the documents creating the obligation permitting the lender to accelerate the loan upon further encumbrance of the property or upon the maturity of the obligation.

• The Act amends current law so that deferred mortgage payments under this provision are not due upon maturity of the obligation.

Senator Eggman, in conjunction with California Attorney General Rob Bonta and Senate President Toni Atkins (D-San Diego) authored the bill, following the results of a California Department of Justice investigation into businesses and individuals that target servicemembers. Senator Susan Eggman, in part, pointed to her own military service in support of the legislation: “As a veteran myself, and coming from a family with a long history of service, I am familiar with how the very nature of serving in the military creates vulnerabilities to consumer scams and unfair business practices. This legislation will provide servicemembers with the consumer protections they need and deserve.”

In addition, the California Office of the Attorney General – Consumer Protection Division enforces applicable laws and regulations against individuals and businesses if they engage in fraudulent practices against servicemembers, veterans, and their families. The attorney general’s office has military legal assistance attorneys and financial counselors throughout California to aid with enforcing the law, including the Act, to protect servicemembers.

The Act gives the office greater authority to protect servicemembers against individuals or entities that seek to take advantage of them by:

• Prohibiting individuals or businesses from using a servicemember’s common access card (CAC), PIN number associated with the CAC, or requiring a servicemember to log in to any Department of Defense or Department of Homeland Security computer system.
• Prohibiting individuals and businesses from conditioning the receipt of a military or veteran discount on a servicemember’s waiver of his/her rights under state or federal law.
• Voiding the waiver of any right provided by the CMVC to servicemembers, former servicemembers, or their dependents.

The Act makes a violation of any of these provisions a misdemeanor. The Act also amends existing law to add an additional $2,500 in civil penalties per violation on top of the existing $2,500 statutory maximum for businesses or individuals who engage in unfair or deceptive practices against members of the military.

Our Take

California is clearly focused on protecting servicemembers from deceptive and unfair conduct. Lenders must avoid the heightened penalties imposed by the Act by ensuring compliance with the new law. This requires a compliance review across all lending channels and processes to ensure nothing runs afoul of these new requirements. Training key personnel and adequate oversight are paramount. We have the experience to assist. Troutman Pepper’s Military Lending Practice Group includes one of the oldest and most well-respected consumer financial services and regulatory practices in the nation. Let us help you ensure our military members are rewarded for their valuable service to our nation.