Financial readiness is military readiness. A servicemember who is focused on repaying a predatory loan is not focused on her mission. And a servicemember who loses his security clearance as a result of a default or other credit issue may not be able to serve at all. Protecting American servicemembers and their families is a core part of the Consumer Financial Protection Bureau’s mission, and it is work that we take very seriously. That is why, this week, the Bureau partnered with the Department of Defense and the Department of Justice to ensure that military families enjoy the full protections of federal law.
On Thursday, we filed a friend-of-the-court brief in Davidson v. United Auto Credit Corp., a case in which a servicemember sued the auto lender that financed his purchase of a used car for violating the Military Lending Act (MLA). The servicemember alleged that the auto lender forced him to waive important legal rights as a condition of accepting the loan and required him to agree to mandatory arbitration should any dispute arise related to the loan. He also alleged that the lender failed to accurately communicate his repayment obligations including by failing to disclose the correct annual percentage rate that he would be required to pay. The lender argues that the loan is not required to comply with the protections afforded by the MLA and that is the issue now before the U.S. Court of Appeals for the Fourth Circuit.
The Military Lending Act affords significant consumer protections to American servicemembers and their families when they procure certain consumer credit products. Its goal is to protect military families from predatory lending. Predatory loan practices and unsafe credit products are frequently targeted at American servicemembers. Congress passed the MLA in light of a recognition that predatory lending undermines military readiness and harms the morale of the troops and their families.
The MLA protects American servicemembers in a variety of ways when they take out a consumer loan. For example, it makes it illegal to require a servicemember to waive their legal rights as condition of the loan or to require arbitration of any dispute that relates to the loan. It also requires the lender to disclose an interest rate that accounts for all the fees and charges incurred as part of the loan and requires the lender to make other helpful disclosures, including by providing a clear description the servicemember’s payment obligations under the loan. You can learn more about the protections the MLA provides here.
Congress exempted some car loans from the MLA. However, in Davidson, two distinct loans were effectively rolled into one. The first loan was an exempt loan used to purchase a car. The second loan was a non-exempt loan used to purchase Guaranteed Auto Protection (GAP) insurance, a distinct and largely unrelated product.
GAP insurance covers the difference (or gap) between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged or totaled. GAP insurance is generally optional, and it does not have to be purchased from the auto lender that is financing the purchase of your vehicle. Depending on your loan and the value of your car, GAP coverage may be of little or no use to you. And lenders sometimes market GAP policies in a manner that is deceptive or misleading. The CFPB has a history of using its enforcement authority to hold lenders accountable who mislead servicemembers about the cost or value of GAP coverage. That is why the Bureau urges servicemembers to shop around before agreeing to purchase GAP insurance or other auto add-on products, to be sure to negotiate a fair and reasonable price, and to be prepared to say no if they are offered a product they do not want or need.
There is no dispute that a loan issued to finance the purchase of GAP insurance alone would be covered by the MLA. There is no reason that a lender should be able to evade the protections afforded by the MLA simply by packaging a loan used to purchase GAP insurance (which is indisputably covered by the MLA) with another loan that is exempt from the MLA.
Put somewhat differently, the loan at issue in this case was a hybrid loan: part of the loan was used for an MLA-exempt purpose (the purchase of the vehicle) but part of the loan was used for a non-exempt purpose (the purchase of GAP coverage). Our brief argues that these sorts of hybrid loans must comply with the MLA and provide servicemembers with all the protections that the MLA guarantees. Our position is consistent with guidance issued in 2016 by the Department of Defense to protect servicemembers, which states clearly that hybrid loans are required to comply with the MLA.
The lender’s position is, in effect, that it can evade the MLA by creatively packaging an otherwise covered loan with an exempt loan. Surely Congress did not intend for the protections it afforded military families through enactment of the MLA to be so easily circumvented. The lender’s reading of the statute allows the narrow exception to swallow the rule and renders the MLA’s important protections hollow. It jeopardizes the financial security, morale, and readiness of American servicemembers. That is why the Bureau joined with the Department of Defense and the Department of Justice in filing this brief urging the court to ensure that the MLA’s protections are given full force in order to protect American servicemembers and their families from predatory lending and unsafe credit products.
The case is Davidson v. United Auto Credit Corp., No. 21-1697 (4th Cir.).