In a new interpretive rule published on February 28, 2020, the Department of Defense (DoD) has announced that it is withdrawing guidance previously issued in its December 14, 2017 Interpretive Rule, Q&A #2, governing motor vehicle and other personal property financing, and will revert back to the position it set forth in the original Q&A #2 published in the August 26, 2016 Interpretive Rule. DoD also issued a new Q&A #21 that expressly permits the use of Individual Taxpayer Identification Numbers (ITINs) to verify whether certain dependents are covered borrowers for the purpose the MLA’s safe harbor.
On March 13, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The DoD’s MLA Interpretive Rule Rollback on GAP and Other Recent Developments in Military Lending Law.” Click here to register.
With regard to motor vehicle and other personal property financing, Interpretive Rule Q&A #2 asks:
Does credit that a creditor extends for the purpose of purchasing a motor vehicle or personal property, which secures the credit, fall within the exception to ‘‘consumer credit’’ under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property?
In the 2017 Amended Answer to Q&A #2, DoD specifically stated that a credit transaction that includes financing for Guaranteed Auto Protection (GAP) insurance or a credit insurance premium would not qualify for the exception because “the credit transaction provides additional financing that is unrelated to the purchase” of the motor vehicle or personal property. GAP insurance protects borrowers from incurring financial losses when a vehicle is damaged and declared a total loss.
After issuing the amended Q&A #2, DoD received several formal requests from industry associations and others urging its withdrawal. According to DoD, the industry expressed “concern that creditors would be unable to technically comply with the MLA if the purchase included products not expressly related to the purchase of the vehicle as described in the amended Q&A #2 . . . because § 232.8(f) of the regulation would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased.” DoD acknowledged that it “finds merit in this concern and agrees that additional analysis is warranted.”
As a consequence, DoD is now reverting to the original 2016 Q&A #2 to “allow the Department to conduct additional analysis on this matter”. The original, now reinstated Q&A #2 does not directly address the issue of financing GAP insurance or other credit products as part of motor vehicle or other personal property credit transactions. Instead, it states that “[a]ny credit transaction that provides purchase money secured financing of personal property along with additional ‘cash-out’ financing is not eligible for the exception under §232.3(f)(2)(iii) and must comply with the provisions set forth in the MLA regulation.” 81 F.R. 58840, 58841. While DoD “takes no position on any of the arguments or assertions advanced as a basis for withdrawing the amended Q&A #2”, DoD’s 2017 hardline position discouraging the financing of GAP insurance and other credit products as part of motor vehicle or other personal property credit transactions has changed – at least for now.
In the new Q&A #21 regarding the use of ITINs, DoD clarified that for the purposes of the MLA safe harbor provision, “an ITIN is a ‘Social Security number.’” Now that ITINs have been added to the DMDC database, a search can identify all covered borrowers who have either a social security number or ITIN. Therefore, it is now clear that a party verifying the covered borrower status of dependents of service members can rely on an ITIN tax processing number in lieu of a social security number in using DMDC. While all U.S. servicemembers have social security numbers, certain dependents of servicemembers do not have social security numbers due to their resident or nonresident alien status.