In a significant decision regarding the treatment of Guaranteed Asset Protection (GAP) under the Military Lending Act (MLA), the U.S. Court of Appeals for the Fourth Circuit has ruled that hybrid loans financing GAP coverage along with motor vehicle purchases are exempt from the MLA’s restrictions. The April 12, 2023 decision in Davidson v. United Auto Credit Corporation was made with a 2-1 majority, accompanied by a vigorous dissent arguing that the majority overlooked Congressional intent behind the MLA.
The dispute centered on the MLA’s definition of ‘consumer credit,’ which explicitly excludes loans ‘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.’ The court examined whether financing additional services like GAP coverage alongside a car purchase affected this exclusion. The case involved Jerry Davidson, an active-duty servicemember who purchased a car and financed GAP coverage through a loan from United Auto Credit Corporation.
Key Findings and Implications
The Fourth Circuit’s decision hinged on interpreting the phrase ‘offered for the express purpose of financing the purchase.’ The court consulted dictionary definitions contemporary to the MLA’s enactment and determined that ‘for the express purpose’ should be interpreted as ‘for the specific purpose,’ not ‘for the sole purpose.’ Consequently, the court concluded that the loan in question was exempt from the MLA, regardless of the additional financing for GAP protection.
Dissenting Opinion
Judge J. Harvie Wilkinson III strongly dissented, arguing that the majority’s interpretation contradicted the MLA’s protective intent. He warned of a potential slippery slope where various services related to vehicle purchases could be included under the MLA exemption. Judge Wilkinson viewed GAP coverage as a distinct financial product unrelated to the vehicle purchase itself.
Regulatory Background and Future Implications
The Department of Defense (DOD) had previously issued guidance on this matter, withdrawing a 2017 Interpretive Rule in 2020 that had clarified the exclusion criteria for GAP insurance. The Davidson decision provides temporary clarity but may prompt the DOD to issue revised guidance. The Department of Justice, DOD, and Consumer Financial Protection Bureau filed an amicus brief arguing against the MLA exemption for hybrid loans including GAP coverage. While the Davidson decision resolves current ambiguity, it may not be the final word on the matter, as state laws like California’s SB 1311, which prohibit the sale of GAP waivers to servicemembers, may provide additional protections.
