Lawsuit focuses on exemption from Military Loans Act for auto loans with GAP

Federal officials again argued that bundled asset protection protection made an auto loan subject to the Military Loans Act, raising a potential concern for dealerships and the auto finance industry.

American Financial Services Association Senior Vice President Celia Winslow cautioned the group’s Vehicle Finance Conference and Expo on March 9 about the amicus brief filed by three federal agencies in January.

GAP coverage pays off any outstanding loan balance from traditional auto insurers – who are required to cover only the actual value of the vehicle – after a total loss. Winslow said the government has reopened a campaign to bring the GAP under the Military Loans Act despite Congress excluding military vehicle loans from the law.

“It’s a huge problem,” she said.

The Consumer Financial Protection Bureau and the Departments of Defense and Justice argued in a January 6 amicus brief for the GAP class action Davidson vs. United Auto Credit that “hybrid loans” containing a vehicle and “a separate non-exempt product” such as the optional GAP would not be exempt.

“The lender’s position is, in effect, that it can escape the MLA by creatively combining an otherwise covered loan with an exempt loan”, Bureau General Counsel Seth Frotman and Deputy Director of the Office of Service Member Affairs Jim Rice wrote in a January 7 blog post.. “The lender’s reading of the law allows the narrow exception to swallow the rule and voids the MP’s important protections.”

Judge Leonie Brinkema of the Eastern District of Virginia agreed with lender United Auto Credit in a May 19, 2021 opinion. The plaintiff, Jerry Davidson, appealed to the Fourth Circuit.

“If this case goes the wrong way, the litigation is going to explode,” Winslow said on March 9.

However, she said the association is “relatively optimistic” about the outcome of the case.

She said the American Financial Services Association is preparing its own amicus brief and working with the National Automobile Dealers Association and other trade groups on the issue. “The whole industry is united” on the fact that car financing is excluded from the law, she said.

About Galen A. Williams

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