Today, the Fourth Circuit Court of Appeals issued a much-awaited opinion affirming the dismissal of a servicemember’s class-action suit brought under the Military Lending Act (MLA or Act) because, even though the secured automobile loan at issue financed guaranteed asset protection (GAP) coverage and other fees, the loan was still given for the “express purpose” of financing the car purchase. Accordingly, the Fourth Circuit held the loan satisfied the MLA’s exception for secured, purchase-money car loans.

In Davidson v. United Auto Credit Corporation, the complaint arose out of the plaintiff’s financing the purchase of a car while on active duty with the United States Army. The plaintiff’s loan with the defendant financed not only the car’s purchase price, but also GAP coverage, a processing fee and pre-paid interest. The plaintiff alleged that the loan violated the MLA because the loan agreement mandated arbitration and failed to include certain disclosures. The district court dismissed the case holding the Act only applies to “consumer credit” loans and that plaintiff’s loan was not “consumer credit” because the Act’s exception for car loans had been satisfied. The plaintiff appealed and the Fourth Circuit affirmed the district court’s decision.

As the Fourth Circuit noted, if a loan is given “for the express purpose” of financing a car purchase, it is excluded from the Act’s coverage. “‘For the express purpose,’ as used in the Act, means for the specific purpose. So a loan whose specific purpose is financing a car purchase still satisfies the § 987(i)(6) exception even if it has other purposes.”

While the court noted that some might read “for the express purpose” to mean for the sole purpose, the court found the context did not support that reading. The court found “for the express purpose,” to be conditional. “It lists things that courts must check before excusing a loan from the [MLA’s] coverage. And there is only one express purpose that courts must check before moving on. ‘The’ express purpose the exception cares about is financing the purchase of a car. It says nothing about other express purposes the loan might have.”

Ultimately, the court found that since the loan to the plaintiff was for the specific purpose of financing the car, it was outside the MLA’s scope.

Judge Julius Richardson wrote the opinion, in which Judge Stephanie Thacker joined. Judge J. Harvie Wilkinson III wrote a lengthy dissent objecting that “[b]y carving out [dual-purpose loans] from the MLA, the majority invites lenders to market financial products—that would otherwise be subject to the Act—through an unregulated back door.” The dissent also disagreed with the majority’s textual interpretation finding “for the express purpose” should be read narrowly. “The language of ‘the express purpose of financing the purchase’ means what it most reasonably appears to mean: that [the defendant] transgressed the limits of the vehicle-loan exception when it financed add-ons beyond the express purpose of [the plaintiff’s] purchase of a car.”

Our Take:

The majority decided this case correctly based on the plain language of the MLA’s broad exception for secured purchase-money automobile loans. While the opinion addressed one form of automobile financing—origination of a loan by a finance company used by the buyer to pay for a motor vehicle—the opinion would apply equally to retail installment contracts originated by dealers and sold to finance companies. Hence, the opinion appears to be controlling as to the predominant forms of financing for motor vehicle purchases.