On September 27, California Governor Gavin Newsom signed into law Senate Bill 1311, the Military and Veteran Consumer Protection Act of 2022 (the Act). The law directly targets, among other things, the Military Loans Act (MLA) exceptions for loans obtained to purchase motor vehicles and other forms of personal property. It comes into force on January 1, 2023.
To begin with, the Act will void a security interest in a motor vehicle if the security interest would result in the exemption of a member, and the loan also finances the purchase of a credit insurance product or an ancillary credit-related product. For example, if an automobile loan funds GAP insurance that California law considers “credit insurance” under California Insurance Code § 1758.992(d)(1), the law will void the lender’s security interest. And by voiding that security, the loan will no longer be exempt from coverage under the MLA, which only exempts purchase-price auto loans secured by the purchased vehicle. 10 USC § 1987 (i)(6) (“The term “consumer credit”…does not include a loan obtained in connection with the purchase of a car or other personal property, where such loan is offered for the express purpose of financing the purchase and is secured by the car or personal property purchased.”). Whether auto lenders can fund GAP waivers, GPS tracking systems or other products that consumer advocates say are credit-related is an open question. In all cases, secured auto loans to covered borrowers who fund GAP insurance must comply with the MLA in all respects, including its 36% interest rate cap, oral and written disclosure requirements, and prohibition of arbitration agreements.
The law is even more draconian with respect to loans taken out by covered borrowers to purchase personal property other than vehicles. Specifically, the Act will void a security interest in personal property other than a motor vehicle, off-road vehicle, trailer or aircraft if the security interest would exempt a loan taken out by a covered borrower under the purchase of personal property. of the deputy. As with auto loans, a security interest in the personal property purchased is required for the MLA exemption. But, unlike the new provision for car loans, this provision is not triggered by financing credit insurance or ancillary credit-related products. It applies to any secured loan under which a covered borrower finances the acquisition of personal property (other than motor vehicles, off-road vehicles, trailers or aircraft). In California, therefore, all secured personal home loans (as defined) to covered borrowers must comply with the MLA.
The law also extends certain consumer protections afforded to military members under the Servicemembers Civil Relief Act (SCRA) and the California Military and Veterans Code (CMVC), including:
- The SCRA authorizes a servicemember to terminate a lease of a motor vehicle if the servicemember performs the lease during a period of military service and subsequently receives military orders for a change of permanent station from a location within the continental United States. United to a location outside of the continental United States, or from a location in a state outside the continental United States to any location outside of that state, or to deploy with a military unit, or as an individual in support of a military operation, for a period of at least 180 days.
- Rather, the law will authorize the termination of this lease if the service member receives military orders for a permanent posting change to a location more than 100 miles from the previous duty station, or to deploy with a military unit, or as individual in support of a military operation, for a period of at least 90 days.
- Applicable California law permits a service member to apply to a court to defer payment of an obligation or liability incurred by the service member prior to the effective date of his or her military service orders. Deferred obligations are currently due upon sale of the property or other event specified in the obligating documents allowing the lender to accelerate the loan in the event of further encumbrance on the property, other than for the preservation or protection of property, or at maturity of the obligation.
- The law amends the current law so that bonds and debts deferred by court order are not due when the bonds mature.
- Applicable California law permits a member of the U.S. Military Reserve or National Guard who is called to active duty to defer payments of specified obligations, including an obligation secured by a mortgage or deed of trust, while he is on active duty. No court order is required. A lender who defers payments on a fixed-term credit obligation or an indefinite-term credit obligation with a maturity date to extend the term of the obligation by the number of months the obligation has been deferred. Applicable law makes any deferred mortgage payment payable upon the sale of the property or any other event specified in the documents creating the obligation allowing the lender to accelerate the loan in the event of an additional charge on the property or at the maturity of the bond.
- The Act amends the current law so that deferred mortgage payments under this provision are not due when the obligation matures.
Senator Eggman, along with California Attorney General Rob Bonta and Senate President Toni Atkins (D-San Diego) drafted the bill, following the results of a California Department of Justice investigation. on companies and individuals who target the military. Senator Susan Eggman, in part, pointed to her own military service in support of the legislation: “As a veteran myself and from a family with a long history of service, I know how the very nature of military service creates vulnerabilities to consumer scams and unfair business practices. This legislation will provide the military with the consumer protections they need and deserve.
Additionally, the California Office of the Attorney General – Division of Consumer Protection enforces applicable laws and regulations against individuals and businesses if they engage in fraudulent practices against military personnel, veterans, and their families. The Attorney General’s Office has military legal aid attorneys and financial advisors throughout California to help enforce the law, including the law, to protect service members.
The law gives the office greater authority to protect service members from individuals or entities that seek to take advantage of them by:
- Prohibit individuals or businesses from using a Service Member’s Common Access Card (CAC), PIN associated with the CAC, or require a Service Member to log into any computer system in the Department of Defense or Department of Homeland Security.
- Prohibit individuals and businesses from making receipt of a military or veteran discount conditional on a service member waiving their rights under federal or state law.
- Cancellation of Waiver of Any Rights Granted by CMVC to Military Members, Former Military Members, or Their Dependents.
The law makes it an offense to violate any of these provisions. The act also amends existing law to add an additional $2,500 in civil penalties per violation in addition to the existing statutory maximum of $2,500 for companies or individuals who engage in unfair or deceptive practices against the military.
California has a clear focus on protecting service members from deceptive and unfair behavior. Lenders must avoid the increased penalties imposed by the Act by ensuring they comply with the new law. This necessitates a compliance review of all lending channels and processes to ensure nothing goes against these new requirements. Training of key personnel and adequate supervision are essential. We have the experience to help you. Troutman Pepper’s Military Lending Practice Group comprises one of the oldest and most respected consumer financial services and regulatory practices in the nation. Let us help you ensure that our service members are rewarded for their valuable service to our nation.