The Trump administration is siding with lenders against the protections — or limitations, depending on your perspective — that service members have under the Military Lending Act (MLA), according to White House documents obtained by NPR and The New York Times. The lending industry has long chafed at the limits on APR, finance charges and insurance products they could sell to service members. A large point of contention is a common, but little understood, product offered to military and civilians alike known as GAP.
What is GAP?
In the automobile realm, GAP (guaranteed asset protection) refers to two products: GAP insurance and a GAP waiver. If your vehicle is totaled, both cover a “gap” between your auto insurance payout and what you owe on car.
This is because when a vehicle is totaled (whether by a car accident, by a huge storm or by a thief stealing it), your regular full-coverage auto insurance pays only a portion of what the car is worth at that time, not what you owe. After all is said and done, you could still owe thousands to your auto lender and have to continue to make payments on a car you can’t use, while you might need to get another car.
This is where GAP steps in — both types of GAP work to pay off the lender so you don’t have to. For this reason, it may be an understatement to say it’s valuable to consumers. For the same reason, it’s valuable to lenders because they’re more likely to get the entire loan paid off.
But here’s where the two products differ: A GAP waiver is usually financed into an auto loan and because it is financed, it falls under the MLA; in fact, the MLA rule only applies to a GAP waiver when it is included in an auto loan. The MLA does not apply to GAP insurance because the price of GAP insurance would never be included in a loan.
Because both products are called GAP and one can fall under MLA rules while the other one doesn’t, there’s a lot of confusion. Lenders and dealerships are also being called out because GAP waivers are more expensive (but offer more protection than GAP insurance) and many people only see the huge price difference.
Here’s a side-by-side chart:
|How much coverage?||Does it cover the auto insurance deductible?||When is it most useful?||What’s the price range?||Where can you get it?|
100% to 150% of the car’s actual cash value (ACV)
Yes, usually up to $1,000
When what you owe on the car loan is greater than what it’s worth
$299 to more than $1,200 for the whole loan
Your lender or the car dealership
25% of the car’s actual cash value (ACV)
When what you owe on the car loan is equal to what it’s worth
Usually less than $100 for a year
Your current auto insurance company
What are the current protections?
The Department of Defense (DoD) ruled in 2016 that the current MLA protection does not allow service members to include a GAP waiver as part of an auto loan if the total amount borrowed (including GAP) means that the whole loan is for more money than what the car is worth or if the Military Annual Percentage Rate (MAPR) is over 36%.
The reason for inventing the category of MAPR in 2006, and putting the limit on it, is not just to limit the APR, but to also limit the amount charged for any add-on products. MAPR is different from APR because it counts the price of the GAP waiver and similar products as a fee — this means that the price of GAP can radically increase the MAPR above 36%, thus making the contract count as illegal predatory lending. MAPR acts as a way to impose overall cost control without making hundreds of rules to limit and monitor every small aspect of lending.
The MLA rule in question, and subsequent DoD interpretations of it, appears to state that going into debt to prevent debt is a catch-22 and should just be avoided. But the rub comes from the fact the lending industry has long taken advantage of service members. In fact, the Consumer Financial Protection Bureau (CFPB) has secured more than $141 million in refunds and compensation for military service members since 2013 from lenders who violated MLA protections. Additionally, auto dealerships, where many people buy GAP, do not have the most stellar reputation of having reasonable prices.
The price range of GAP waivers can be dramatic. It is loosely based on how much you borrow, but dealerships and lenders sell it for anything from $299 to more than $1,200. If you don’t know that you can negotiate on the price or get it for cheap at another dealer or lender, you might be convinced to pay four times the amount.
Reasons for rolling back the protections
The lenders’ argument is that GAP would be most useful to protect both the consumer and the lender in an in-debt situation. Three credit union trade groups, the National Association of Federally-Insured Credit Unions, the Defense Credit Union Council and the Credit Union National Association, petitioned the DoD in early 2018, asking it to reconsider — that this protection, in financial reality, is a limitation that prevents the service member from getting protection.
The National Automobile Dealers Association (NADA) agrees. For all civilians, GAP (and products like GAP) are not considered fees on an auto loan, but separate products as all consumers can think about and voluntarily choose to purchase or finance as they wish.
What would the change mean?
There are two potential changes on the table. The first is for the MLA to not include GAP as a fee. This would mean service members could finance GAP in auto loans more easily, because the price for it would not be subject in the overall loan conforming to the MAPR 36% rule. The second change is that the Consumer Financial Protection Bureau (CFPB) would stop actively monitoring the loan market for predatory lending on active duty service members and their dependents.
Both are a bad idea, according to Tom Feltner, director of research at the Center for Responsible Lending, who said the fact the industry is pushing for new loopholes and new exemptions to the MLA is troubling.
“I think it is very concerning that they are shifting enforcement onto service members and their families,” Feltner said. “The supervisory process is fundamental,” and if monitoring stops, then “it is incumbent on the service members to report the violations themselves.”
What happens next?
As of Aug. 15, almost half of the U.S. Senate urged that the CFPB not weaken protections for military service members. The DoD conducts both the rulemaking and any additional guidance on the MLA in conjunction with appropriate organizations, including the CFPB and the Federal Trade Commission. Even if these two changes are shot down, Feltner said it looks like the CFPB will continue the rollback of consumer protections in general.
Whether or not these changes occur, servicemembers should educate themselves and always pay close attention to the fine print and costs when making any type of financial decision. And as is the case with all potential policy changes, you may want to contact your representatives in Congress to let them know your opinion on the matter.