4th Circuit rules dual purpose auto loan is not covered by MLA

Military Lending Act
Jerry Davidson v. United Auto Credit Corporation
Date: April 12, 2023

Issue: Whether dual purposed loans, which include both vehicle financing and related costs, are exempt from the Military Lending Act’s (MLA) protections or service members who take out consumer credit.

Case Summary: In a 2-1 decision, a Fourth Circuit panel ruled vehicle financing transactions including guaranteed asset protection (GAP) plans are exempt from the protections of the MLA.

The Military Lending Act regulates lenders when they extend “consumer credit” to members of the military. However, if the loan is “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” then it is not considered “consumer credit.” (10 U.S.C. § 987(i)(6))

Jerry Davidson, an active-duty service member, purchased a car using a retail installment contract which also financed GAP coverage, a processing fee, and pre-paid interest. Davidson sued United Auto Credit Corporation alleging the loan agreement violated the MLA because it mandated arbitration and failed to include required MLA disclosures. Davidson argued the phrase “express purpose” in the MLA meant a borrower’s decision to purchase and finance a separate GAP plan would subject the contract to the MLA.

The district court dismissed the case, concluding the MLA only applies to “consumer credit” loans, and Davidson’s loan was not “consumer credit” because the MLA’s exception for car loans was satisfied. While GAP coverage is optional, the court opined the standalone financial product was “inextricably tied” to Davidson’s vehicle purchase and protects the purchase if theft or damage results in a total loss.

On appeal, the Fourth Circuit panel affirmed. Because Davidson received the loan for the express purpose financing the car, the panel ruled the loan was outside the MLA’s scope. In writing the majority opinion, Judge Julius Richardson emphasized if a loan given “for the express purpose” of financing a vehicle purchase, it is excluded from the MLA’s coverage. As described by the majority, the phrase “for the express purpose, as used in the Act, means for the specific purpose. So, a loan whose specific purpose is financing a car purchase still satisfies the § 987(i)(6) exception even if it has other purposes.”

The majority also interpreted the phrase “for the express purpose” to emphasize Davidson’s GAP plan was exempt from the protection of the MLA. According to the MLA when a loan is offered “for the express purpose of financing the purchase and is secured by the car”, the act does not apply. Davidson argued “for the express purpose” meant for the “sole” purpose, and therefore his loan would not be exempt from MLA protections, as his loan had other functions than financing the vehicle. The majority explained “for the express purpose” with § 987(i)(6)’s context shows that it means “for the specific purpose,” not “for the sole purpose.” Therefore, his loan would be exempt from MLA protections.

In dissent, Judge J. Harvie Wilkinson III critiqued the majority’s interpretation of the text. In Judge Wilkinson’s view, the car loan exception should be read narrowly given the MLA’s framework to protect service members from financial harm. By opening up the exception to include additional loans, Judge Wilkinson emphasized the majority’s interpretation “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan.”

Bottom Line: The Fourth Circuit’s decision clarifies uncertainty on whether GAP plans are subject to the vehicle-finance exemption. The U.S. Department of Defense submitted an amicus brief in support of Davidson which suggests the issue may be addressed directly in future rulemaking.

Documents: Opinion