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Does the MLA exemption for vehicle purchase money apply if the bank finances credit life as part of the loan? What if it finance the loan origination fee?

My bank has received a loan application from an active duty military individual to purchase a vehicle. My understanding is that if the bank finances credit life as part of the loan that the exemption from the Military Lending Act (MLA) for vehicle purchase money loans no longer applies. Is the same true if the bank finances the loan origination fee?

No. Financing a loan origination fee does not disqualify a loan from MLA exemption for vehicle purchase money loans.

First, under both the statute and the regulation MLA exempts from the definition of “covered credit” “a loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.” Second, the Department of Defense’s “Interpretive Rule,” as revised in December 2017, lists two items that, if financed by the loan, make the loan ineligible for the exemption. Those two items are (1) credit-related products and (2) hybrid purchase money and cash advance credit transactions. Thus, a purchase money loan financing an origination fee is exempt.

Moreover, notwithstanding the Department of Defense’s Interpretive Rule, to be exempt from MLA, neither the statute nor the MLA Regulation requires that the loan only finance the item securing the loan. Under both the statute and the regulation, loans are exempt if they are offered for the “express”— not “sole” — purpose of purchasing the property being used to secure the loan. Thus, both the statute and the MLA Regulation exempt purchase money loans even if they are used to finance other items such as credit insurance because the loans are offered for the express purpose of purchasing the vehicle. Legally, the statute and regulation prevail over any inconsistent provision in an interpretive rule. Indeed, some federal banking agencies have recently emphasized that statutes and regulations are “law”; guidance (e.g., an interpretive rule) is not.

In amended Q&A 2, the DoD addressed the application of the MLA rule’s exemptions for credit transactions that are intended to finance the purchase of a motor vehicle or personal property when the credit is secured by the purchased motor vehicle or personal property and where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property. The DoD’s amended answer stated that the exemptions are available where credit beyond the purchase price of the object is used to finance “any costs expressly related to that object…provided it does not also finance any credit-related product or service.” (July 2019)

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