The Great MLA Mess
I could call the current situation with the MLA interpretive rule something more genteel than a “mess,” but I fear as though that would detract from what it is. Specifically, I am referring to Question & Answer 2 from the amendment to the interpretive rule issued on December 14, 2017. I want to stop for a moment here and preface the rest of my opinion before I delve into it. The people in the Department of Defense, and more particularly the men and women who choose to serve and protect our nation, are owed immense gratitude. The fact that I can sit safely at my desk and type up an opinion on any matter is in thanks to the freedoms their service guarantees.
With that said, bureaucrats are bureaucrats. The principle of a civilian-led military can be held as crucial to a free nation, but the people at the top tend to be bureaucrats regardless of the purpose or the intentions. This is not something negative in-and-of-itself, at least as long as those bureaucrats are true experts in the fields in which they are engaged. The Department of Defense has experts in many fields, but it is not filled with experts on the financial industry.
The financial system is a simple concept on paper made incredibly complicated in reality, perhaps first and foremost by the necessity for safety and protection.
I will add that we are unlike most industrialized nations in the world in the way we have split the responsibilities for overseeing the financial industry. In general, this has not created substantial problems. The federal bodies created for overseeing the financial industry coordinate well overall and they are filled with people whose entire careers have been related to that industry. Whether they come from outside of it, within it, or spent time in both positions, they are often intimately familiar with how the system of savings, investing, and lending work. In short, even with all the bodies and departments involved, they are all filled with experts on the matters they are charged to oversee and address.
The financial system is a simple concept on paper made incredibly complicated in reality, perhaps first and foremost by the necessity for safety and protection. Without a firm sense of security in the financial system, economies can grind to a screeching halt or even come crashing to the ground. It is indeed so complicated that we can find plain examples of when even the people we expect to be experts got it wrong.
I am not one who likes to express discontent. I prefer calm discussions to accusations and heated debates. However, with even just the brief consideration of our financial system and its oversight, I genuinely feel that shock and disappointment is a warranted response when the Department of Defense appeared to casually issue an opinion to a rule with major repercussions for lenders and dealers with no chance for debate.
I firmly believe that the DoD meant well. I like to think that this was genuinely meant as a protection for our service members and not a politically motivated assault on the lending industry. I could see how one might suspect the latter, though. Just by itself, Q&A 2 has the potential to prove severely disruptive and harmful for service members looking for automobile loans. Guaranteed asset protection, or GAP insurance, is an inexpensive insurance product that protects borrowers against a worst-case scenario, namely the loss of the vehicle without enough to pay off the balance of the loan. As issued, Q&A 2 effectively chases lenders and dealers away from even offering it to service members.
To attempt to enforce the rule as presented in the current iteration of Q&A 2 on a retroactive basis could be harmful or even disastrous for those lenders and dealers ill-equipped to address it retroactively.
Perhaps worst of all, however, is that the amendment has a retroactive effect to when the interpretive rule was first issued in 2016. This means that all loans made in a period of more than a year were subject to a rule that no one reasonably believed to exist. I do not believe it is far-fetched to suggest this could present a legal crisis. Legal certainty is internationally recognized as one of the central tenets to the rule of law. In order for laws to be effective, it must be within the reasonable capacity of those governed by those laws to follow them. It would seem that if an entire industry, its experts, and its legal advisers did not conceive of this interpretation to the rule, then those being governed by it had no reasonable capacity to follow it. To attempt to enforce the rule as presented in the current iteration of Q&A 2 on a retroactive basis could be harmful or even disastrous for those lenders and dealers ill-equipped to address it retroactively.
The new Under Secretary of Defense for Personnel and Readiness, Mr. Robert Wilkie, has just recently taken his office. Ideally, he can work with those who developed and issued the rule to come up with a reasonable solution. Hopefully, we will see Q&A 2 either rescinded or at least significantly reworded to enable our service members the same access to inexpensive insurance products that benefit many borrowers. At the very least, we can hope that lenders and dealers will be given some reprieve in the removal of the retroactive element. Either way, a strong signal for a positive change to the rule would go a long way to easing the tensions that it created. Until something is done, however, lenders and dealers should work closely with their legal professionals to determine the best way to approach this new hazard in lending.