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How amended MLA Regulation affects dealers

October 7, 2016
The Department of Defense recently amended a regulation known as the Military Lending Act Regulation, which imposes certain restrictions and requirements on creditors — including, potentially, auto dealers — when they extend credit to service members and their dependents. 
Significantly, the amended regulation, which took effect Oct. 3, excludes from its coverage "any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased." On its face, this exclusion would seem to address any claim that the MLA Regulation applies to auto dealers originating motor vehicle financing.  
However, a recent Defense Department interpretation of a separate exclusion to these requirements has caused some commentators to question whether the department views the motor vehicle exclusion as narrow in scope and only applicable to the financing of the motor vehicle itself (as opposed to the financing of the motor vehicle as well as other related items that are financed with the motor vehicle).
Officials at the Defense Department have been unwilling to clarify its view regarding the scope of the exclusion for motor vehicle financing. 
Some finance sources that take assignment of credit contracts from dealers no doubt have been communicating to dealers regarding this topic. To assist dealers who receive such communications, the National Automobile Dealers Association asked an expert law firm to prepare a general analysis of the scope of the motor vehicle financing exclusion from the MLA Regulation. 
In "Are Auto Dealers Required to Comply with the Amended Military Lending Act Regulation?", Andrew Smith of Covington & Burling LLP outlines the compelling arguments supporting why (i) the motor vehicle financing exclusion covers the financing of a motor vehicle as well as other related items; and (ii) consequently, the restrictions and requirements imposed by the amended regulation should not be applicable to auto dealers who engage in such financing.  
Note certain caveats that Smith identifies in his article: 
• The article is generic and not intended as legal advice to individual dealers; 
• It therefore is essential that dealers consult their own counsel for legal advice concerning whether and to what extent the amended MLA Regulation applies to their individual operations; 
• As noted, finance sources that participate in indirect vehicle financing may have a different view on this matter and, as such, may communicate to dealers certain actions they require dealers to perform and/or refrain from as it relates to credit contracts dealers assign to them; and 
• Most significantly, there is no guarantee that courts, administrative agencies, or others reviewing this issue will agree with the article regarding the scope of the motor vehicle financing exception and whether the amended MLA Regulation applies to dealer operations. 
The NADA will continue to monitor this situation and provide further updates when circumstances dictate or additional relevant information becomes available.