Pub. 2018 Issue 1
15 your customer is a covered borrower, however, you must consider the 2 MLA obstacles mentioned earlier. First, according to guidance issued by a secured transactions expert at HudsonCook LawFirm, a lender cannot create a security interest in a vehicle that is financed in a transaction that is subject to the MLA. The inability to create a lien on a financed vehicle makes the transaction extremely risky at best, but, practically speaking, impossible. The second hurdle, if you are able to find a lender who is willing to take a chance on an unsecured vehicle loan, is that the MLA caps the Military Annual Percentage Rate (MAPR) at 36%. (A discussion of how to calculate the MAPR is included later in this article). The IllinoisHumanRights Act prohibits discrimination against members of the military, but the Act does create an exemption for sound underwriting practices when contemplating a loan for any person. You canmaintain theMLA exemption if you refrain from selling credit-related products and services to covered borrowers. IADA recommends that you document the inability to find a lender to take on the unsecured transaction as your sound underwriting justification for not offering credit-related products and services to covered borrowers. If you are able to find a lender who is willing to finance a transaction with obtaining a security interest in the vehicle, you must still make sure that the transaction complies with the MLA. If you extend credit to a covered borrower in an amount greater than the purchase price of the vehicle, the Military Annual Percentage Rate (MAPR) cannot exceed 36%. The MAPR, however, is defined differently than the definition of APR under the Truth in Lending Act. MAPR includes "all cost elements associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary products sold with any extension of credit to a servicemember or the servicemember's dependent, as applicable, and any other charge or premium with respect to the extension of consumer credit". If the MAPR exceeds 36% for a covered borrower, you must not complete the transaction. If the MAPR does not exceed 36%, you must make oral and written disclosures in addition to those required under the Truth in Lending Act. When extending credit to covered borrowers in an amount greater than the purchase price of the vehicle, the following model statement, must be made orally AND in writing: "Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to amember of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account)." The oral disclosure can be made in-person or on a toll-free telephone number. In addition to the required disclosures, finance deals that come under theMLA cannot include a provision requiring the customer to submit a dispute to arbitration. If your finance contracts include a mandatory arbitration agreement, you will have to remove that provision for customers covered by the MLA. It is important to get your MLA compliance right, because the penalties for violations of the Act are severe, including: • A misdemeanor for knowing violation • Contracts that violate the MLA are void • Civil liability for violation comprised of: • Actual damages (minimum of $500 per violation); • Equitable or declaratory relief; • Other relief as provided by law, including punitive damages; and • Attorney fees and costs. The National Automobile Dealers Association is working with the Department of Defense to try to it to rescind, or at least clarify the new rules. We will keep you posted as the situation develops. If you have any questions about this article, please contact IADA at (217) 753-0220 or ldoll@illinoisdealers.com. LEGAL ISSUES DISCUSSED IN THIS BULLETINARE FORGENERAL INFORMATION AND ARE NOT LEGAL ADVICE. DEALERS SHOULD CONSULT PRIVATE LEGAL COUSEL FOR APPLICATION IN PARTICULAR CASES. First, according to guidance issued by a secured transactions expert at Hudson Cook Law Firm, a lender cannot create a security interest in a vehicle that is financed in a transaction that is subject to the MLA. The inability to create a lien on a financed vehicle makes the transaction extremely risky at best, but, practically speaking, impossible.
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