For practical reasons, GAP cannot be financed in a retail installment sale contract (RISC) involving a buyer or co-buyer eligible for protection under the Military Lending Act (MLA), even if the creditor is willing to comply with MAPR disclosures and limitations and the other MLA limitations and requirements.

Under current Department of Defense (DOD) regulations and guidance, financing GAP in the transaction subjects the RISC to MLA requirements and restrictions. One of those restrictions is that a financing transaction subject to the MLA cannot use the title of the vehicle as security for the obligation.

Based on past DOD statements, the DOD is likely to conclude that this restriction prohibits a creditor from using the vehicle being financed as collateral in a RISC subject to the MLA. All RISCs use the financed vehicle as collateral. So inclusion of GAP in a RISC with a buyer or co-buyer likely violates the MLA, unless the provisions that make the financed vehicle collateral are removed. But there would be no market for a RISC that did not use the financed vehicle as collateral.

So, in effect, the MLA prohibits the financing of GAP in a RISC involving a buyer or co-buyer eligible for protection under the MLA on any practical basis.

Prepared by Thomas J. Buiteweg, Esq., Hudson Cook, LLP

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