In Davidson v. United Auto Credit Corp., No. 1:20-cv-1263 (LMB/JFA), 2021 U.S. Dist. LEXIS 95302, at *11-17 (E.D. Va. May 19, 2021), Judge Brinkema dismissed a claim against an automobile lender under the Military Lending Act because Plaintiff’s theory was based on a DoD interpretation that had been withdrawn.
On December 14, 2017, using the same question and answer format, the DoD issued a second set of interpretations, which were applicable to loans for the purchase of motor vehicles as well as for personal property: 2. 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? Answer: The answer will depend on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance. Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions. Section 232.3(f)(1) defines “consumer credit” as credit offered or extended to a covered borrower primarily for personal, family, or household purposes that is subject to a finance charge or payable by written agreement in more than four installments. Section 232.3(f)(2) provides a list of exceptions to paragraph (f)(1), including an exception for any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased and an exception for any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased. A credit transaction that finances [*13] the object itself, as well as any costs expressly related to that object, is covered by the exceptions in § 232.3(f)(2)(ii) and (iii), provided it does not also finance any credit-related product or service. For example, a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle), and also finances optional leather seats within that vehicle and an extended warranty for service of that vehicle is eligible for the exception under § 232.3(f)(2)(ii). Moreover, if a covered borrower trades in a motor vehicle with negative equity as part of the purchase of another motor vehicle, and the credit transaction to purchase the second vehicle includes financing to repay the credit on the trade-in vehicle, the entire credit transaction is eligible for the exception under § 232.3(f)(2)(ii) because the trade-in of the first motor vehicle is expressly related to the purchase of the second motor vehicle. . . . In contrast, a credit transaction that also finances a credit-related product or service rather than a product or service expressly related to the motor vehicle … is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii). For example, a credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception under § 232.3(f)(2)(ii) or (iii). Similarly, a hybrid purchase money and cash advance credit transaction is not expressly intended to finance the purchase of a motor vehicle . . . because the credit transaction provides additional financing that is unrelated to the purchase. Therefore, any credit transaction that provides purchase money secured financing of a motor vehicle . . . along with additional “cashout” financing is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii) and must comply with the provisions set forth in the MLA regulation. 2 Fed. Reg. 58739-01, 58740 (Dec. 14, 2017) (emphasis added). The parties agree that if the 2017 DoD interpretation were currently in effect there would be no dispute over the Contract being governed by the MLA. It would be covered, and the Court would have to address the remaining issues in the Motion to Dismiss regarding whether the contract violated the MLA. What complicates this issue is the DoD’s decision on February 28, 2020 to withdraw the 2017 Q&A interpretation: Subsequent to the publication of the December 14, 2017 Interpretive Rule, the Department received several formal requests for the Department to withdraw the amended Q&A #2 from the December 14, 2017 Interpretive Rule. One point raised in the requests for withdrawal was a concern that creditors’ [sic] 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 from the December 14, 2017 Interpretive Rule, 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. The Department finds merit in this concern and agrees additional analysis is warranted. In withdrawing the amended Q&A #2, published on December 14, 2017, because of unforeseen technical issues between the amended Q&A #2 and 32 CFR 232.8(f), the Department, absent of additional analysis, takes no position on any of the arguments or assertions advanced as a basis for withdrawing the amended Q&A #2 from the December 14, 2017 Interpretive Rule. . . . This amended interpretive rule does not change the regulation implementing the MLA, but merely states the Department’s preexisting interpretations of an existing regulation. February 28, 2020 Interpretive Rule, 85 Fed. Reg. 11842-02, 11843 (Feb. 28, 2020). Plaintiff argues that his loan included three identifiable credit-related charges that were not related to the motor vehicle itself: GAP coverage, a processing fee, and prepaid interest. SAC, Ex. A, Installment Contract. As a result, the loan did not finance “only” the motor vehicle, making the MLA motor vehicle exception inapplicable. Defendant responds that accepting plaintiff’s argument would essentially reinstate the 2017 Q&A Interpretation, which the DoD expressly withdrew on February 28, 2020 due to its incompatibility with 32 C.F.R. § 232.8(f). Although the DoD stated that it “takes no position on any of the arguments or assertions advanced as a basis for withdrawing” the 2017 Q&A Interpretation, adopting plaintiff’s position would essentially contradict the DoD’s withdrawal of the guidance by effectively reinstating it, because the clear language of 32 C.F.R. § 232.3(f)(2)(ii) excepts the Contract at issue. Plaintiff’s argument that the GAP coverage, processing fee, and prepaid interest were unrelated to the purchase of the motor vehicle itself is problematic. The GAP coverage provides a form of insurance directly related to the motor vehicle and protects the purchaser in the “event of theft or damage to the Vehicle that results in a total loss,” and the processing fee and prepaid interest are directly related to plaintiff’s purchase of the vehicle. Plaintiff argues that the 2016 Q&A Interpretation for personal property should apply to the motor vehicle exception and that the Court should find that these three charges were not expressly intended to finance the purchase of the motor vehicle. That argument is unpersuasive. The 2016 Q&A Interpretation only applied to personal property and did not address motor vehicles. Even if one could expand it to motor vehicle purchases, none of the three charges at issue in this action provide additional financing that is unrelated to the purchase of the motor vehicle; rather, they are inextricably tied to plaintiff’s purchase of the vehicle.