BMW Under Investigation Over Car Leasing Practices to Military Members

The U.S. Justice Department requested information from BMW AG’s leasing unit last year, hoping to get a handle on how it deals with delinquent payments from military personnel. The Servicemembers Civil Relief Act is intended to provide a wide range of protections for individuals required to enter active duty by suspending certain civil obligations, including outstanding credit card debt and auto leases.

However, BMW’s Financial Services said it doesn’t know how many of its leases might be affected by the Servicemembers Civil Relief Act’s terms. That’s not a great position to be in when federal law explicitly bans any action or penalty against currently deployed military personnel.

According to documents obtained by Bloomberg, which are tied to a $1 billion bond transaction being marketed to investors this week, BMW doesn’t have the foggiest on which of its lessees are on active duty.

Car loans have come under growing scrutiny as the outstanding auto debt in the United States has surpassed the trillion dollar mark. Many auto loans are even being financed in a manner similar to the way subprime mortgages were grouped into securities right before the recession.

The Justice Department began taking an interest in auto lending practices in 2014. Early investigations focused on lending to borrowers with subprime credit and the unhealthy financially engineering of those loans. However, officials are now taking direct action against lenders over how they manage defaults.

“We shouldn’t wait until there is a crisis to pay attention,” the Justice Department’s former Acting Deputy Attorney General Sally Quillian Yates said in 2014. “We can and should use our experience investigating mortgage-backed securities to be on the lookout for, and head off, any potential threat, rather than waiting until after losses have been suffered.”

Although, in all fairness, BMW probably doesn’t keep tabs on every lessee on the off chance that they might go on active duty and the leasing industry is a vital component of any automotive company. BMW makes a lot of money from leased vehicles, as do most premium brands, and that is especially important for the automaker after posting its uncharacteristically weak earnings from last year. Still, the law is the law and the Civil Relief Act exists specifically to protect individuals from coming under financial hardships through no fault of their own.

BMW Financial has stated that it is cooperating with the Justice Department’s requests but would not elaborate further.