As the Consumer Financial Protection Bureau (CFPB) noted last week, financial readiness is military readiness. But financial priorities will be different for just about every active military servicemember depending on their or their family’s circumstances. A servicemember who is focused on repaying a loan on a car she no longer has, while also paying another loan for a new car because she lives off base and commutes, may lose focus on her mission. That’s why auto lenders offer a product called a GAP waiver.

GAP or “guaranteed asset protection” can assist borrowers out of a deep financial bind if their vehicle is stolen or totaled while they still owe payments on a car loan beyond the actual value of the car. A GAP waiver, also known as a “debt cancellation agreement,” is intended to alleviate some or all of the difference between what a borrower owes on his auto finance agreement and what his insurance will pay him if the vehicle is totaled. (While the terms gap “insurance” and gap “waiver” are often used interchangeably, they’re actually different. GAP waivers are not insurance.)

Late last week, the CFPB, Department of Justice (DOJ), and Department of Defense (DoD),  submitted an amicus brief in a case (Davidson v. United Auto Credit Corp) in which a servicemember sued the auto lender for violating the Military Lending Act (MLA) in the financing of a used-car purchase. In a blog post about the case, the CFPB wrote:

“Congress exempted some car loans from the MLA. However, in Davidson, two distinct loans were effectively rolled into one. The first loan was an exempt loan used to purchase a car. The second loan was a non-exempt loan used to purchase Guaranteed Auto Protection (GAP) insurance, a distinct and largely unrelated product.”

and

“Put somewhat differently, the loan at issue in this case was a hybrid loan:  part of the loan was used for an MLA-exempt purpose (the purchase of the vehicle) but part of the loan was used for a non-exempt purpose (the purchase of GAP coverage).”

The agencies argue that what they call “hybrid” loans should not be exempted from the MLA.

However, there are a number of problems with the federal agencies’ position. First, it does not align with the law. Per the plain language of the MLA, the transaction at issue in Davidson is not subject to the MLA. Simply put, the purchase of the GAP, as the lower court held, is “inextricably intertwined” with the car purchase. GAP is certainly not a “largely unrelated product.” Second, the purpose of the exemption will be meaningless if the agencies do not allow it to apply to things inextricably intertwined with the purchase of an auto. Third, the position advocated now by the agencies is directly contrary to the actions taken and guidance published by the DoD (the agency charged with promulgating the rules under the MLA), upon which auto lenders have relied to allow servicemembers to buy and finance GAP when they purchase a motor vehicle. Lastly, GAP waivers provide a substantial benefit to servicemembers. Industry estimates show that GAP waivers could save servicemembers approximately $15 million a year.