Defense Dept. closes GAP confusion

Dealer associations are praising the Department of Defense's decision last week to rescind a controversial interpretation of the Military Lending Act, clearing confusion that has prevented dealers from selling guaranteed asset protection, or GAP, to military members and covered relatives.

The Pentagon withdrew part of a previously amended Q&A published in the December 2017 Interpretive Rule — specifically Q&A No. 2, which classified GAP as a "credit-related cost." The change took effect Friday, Feb. 28.

Under the 2017 interpretation, if a vehicle finance contract for active military members or their dependents included financing for credit-related products or services or provided cash-out financing, the creditor — which would be the dealership or lender — had to comply with the Military Lending Act.

In explaining its recent decision, the Pentagon cited several formal requests for the department to withdraw the amended Q&A No. 2 and a concern that creditors would be unable to comply with the act "if the purchases included products not expressly related to the purchase of the vehicle," as described in the Q&A. The department agreed with requests that further analysis is needed.

For more than two years, franchised dealer and auto finance groups such as the National Automobile Dealers Association and the American Financial Services Association urged the department to repeal Q&A No. 2.

In a combined statement, the groups said the Pentagon's latest action is "a great victory" and "critically important" for those military members and their relatives to be able to purchase credit-related products such as GAP.

The Defense Department recognized that its interpretation of MLA "was preventing GAP waiver from being offered. They clearly did not intend to have that effect," said Paul Metrey, vice president of regulatory affairs for NADA.

In an August 2019 letter to the Pentagon, NADA shared data from a single lender that showed 310 service members totaled their vehicles since January 2018. On average, each customer owed $2,700. The data was from just one of hundreds of lenders that work with members of the military, NADA said.

"Clearly, the full effect on service members of this situation is much greater," NADA said in the letter.
Especially for dealers in states that have military bases, "this has been pretty constant for us," said Mike Alford, NADA's regulatory affairs committee chairman and president of Marine Chevrolet-Cadillac in Jacksonville, N.C.

Just last month when Alford was at the NADA Show in Las Vegas, his comptroller texted him about a service member without GAP who had totaled a vehicle. The customer owed $4,800.

"This is a really positive solution," said Alford. "We should be able to go forward with selling GAP waivers."

Don Hall, CEO of the Virginia Automobile Dealers Association, told Automotive News the Pentagon's decision is a "wake-up call" for dealerships that sell these products in their F&I departments to make sure there is proper disclosure throughout the buying process.

"I am delighted that after two-plus years the Department of Defense has made the right decision … with the caveat that as an industry, let's make sure that people get a good return for their investment," said Hall, who served in the Marine Corps.

In North Carolina — a state with several major military bases — Robert Glaser, president of the state's dealer association, said dealers were concerned about the financial exposure to military members in the event of a car accident. He is "absolutely thrilled" that dealers will be able to provide GAP to them.

The Washington Area New Automobile Dealers Association also called it a win for military families, as GAP protects them "from potentially ruinous financial losses," CEO John O'Donnell said.

Will Green, president of the Louisiana Automobile Dealers Association, said it is a "huge win" for the military and the auto retail industry — especially in his state, where natural disasters such as flooding and hurricanes damage personal property.

The National Independent Automobile Dealers Association also applauded the Pentagon's decision, with the group's CEO Steve Jordan calling it a "great day when common sense prevails for the driving public."

Hannah Lutz contributed to this report.