Essentially, the DoD is saying that “it depends.” A determination of whether credit extended beyond a motor vehicle’s purchase price falls into the exemption depends on what the credit beyond the purchase price is used to finance.
The Department’s answer divides transactions into two buckets. The first is costs that are related to the object securing the credit—in other words, costs related to the motor vehicle securing the credit. If it’s related to the object, then that exemption is otherwise intact. This would include, for instance, credit that finances the purchase of a motor vehicle, as well as optional leather seats, an extended warranty for service, or negative equity. Anything related to the object that’s being financed and securing the credit falls within the exemption.
If the costs are credit-related costs, however, there is no exemption—which means all of a sudden the lender needs to comply with the Military Lending Act. The examples the DoD provides in this section are where the issue lies: the Department gives an example of a credit transaction that includes financing for GAP or credit insurance premium, plus cash-out financings, explaining that those would blow the exemption, and that a lender would therefore have to comply with the Military Lending Act.
This rule would have already given lenders migraines if it applied to only future deals, but remember, this DoD interpretation covers all contracts that have been entered into after October 3rd, 2016.
And there are serious enforcement provisions and penalties of non-compliance. A knowing violation of the law is a misdemeanor that could lead to fines, prison time, or both. Any contract that’s in violation of the Military Lending Act is void from its inception. There’s civil liability in the form of actual and punitive damages, and attorney’s fees and costs. The arbitration agreement is unenforceable. And the law can be administratively enforced by, for example, the CFPB, the FTC, or other federal prudential regulators. Last but not least, the statute of limitations is quite long: 2 years from discovery, up to a max of 5 years.