On September 29, a proposed amendment to the U.S. Department of Defense’s regulation that implements the Military Lending Act (MLA) was published in the Federal Register, with comments due by November 28. Most importantly, the amendment expands the protections of the MLA by defining “consumer credit” to be consistent with closed- and open-end credit products already regulated under TILA, which would include all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. Currently, the MLA only applies to (i) closed-end payday loans up to $2,000 with a term of 91 days or fewer; (ii) closed-end auto title loans with a term of 181 days or fewer; and (iii) closed-end tax refund anticipation loans. However, the proposed regulation would continue to exclude residential mortgages and purchase-money loans for personal property from coverage, including motor vehicles. The MLA was passed in 2006 and provides active duty servicemembers and their dependents with, among other protections, a 36% interest rate cap, military-specific disclosures, and a prohibition on creditors against requiring the servicemember to submit to arbitration in the event of a dispute.
On July 22, 2015, the Department of Defense (“Department”) released its final rule amending the regulations that implement the Military Lending Act (“MLA”), which means that a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”) will now be subject to the MLA and its “all-in” 36% military annual percentage rate (“MAPR”) cap.
Specifically, the Department expanded the definition of “consumer credit” to be consistent with credit that is subject to the Truth-in-Lending Act (“TILA”)—credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.
In response to the initial proposed rule, financial services industry stakeholders undertook a substantial effort to show how proposed modifications to the MLA regulations were overly broad and, in parts, inconsistent with the Department’s mandate under the MLA. At a high level, industry comment letters fell into five categories: Read more…
CFPB Director Announces Indirect Auto Finance Proxy Methodology White Paper, Discusses Numerous Other Initiatives
On June 18, in an appearance before the House Financial Services Committee, CFPB Director Richard Cordray stated that later this summer the CFPB hopes to release a white paper on the proxy methodology it employs to identify alleged discrimination in indirect auto financing. The white paper follows repeated attempts by members of the Committee to force the CFPB to reveal more details about its approach to indirect auto finance enforcement. Director Cordray also revealed that the CFPB is working on a white paper regarding manufactured housing finance.
The hearing covered numerous additional topics, some of which overlapped with those addressed during Mr. Cordray’s recent appearance before the Senate Banking Committee. Among the new issues raised before the House Committee, Mr. Cordray expressed openness to developing a limited advisory opinion process for the CFPB. In response to a question from Rep. Ed Royce (R-CA), Mr. Cordray explained that the CFPB regularly provides informal advisory opinions. He acknowledged other agencies’ use of advisory opinions and their potential benefit, and indicated that advisory opinions could be a useful tool for the CFPB on certain specific issues. Nevertheless, he resisted committing to the implementation of a formal advisory opinion process. The Committee recently approved, along party lines, legislation that would require the CFPB to establish an advisory opinion process. Read more…
On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.” Read more…
Recently, the Department of Defense (DOD) published a report on the Military Lending Act (MLA), as requested in the House report that accompanied the fiscal year 2013 National Defense Authorization Act (FY 2013 NDAA). The MLA generally covers short-term, small dollar loans, including payday, car title, and refund-anticipation loans, but current DOD regulations exclude credit cards, overdraft loans, military installment loans, and all forms of open-end credit. Consumer advocates, state attorneys general, and others have called for the MLA regulations to be expanded to cover other products. The DOD report provides a summary of responses the DOD received in response to a 2013 advance notice of proposed rulemaking related to the potential expansion of the MLA regulations, and reviews state and federal policy developments, as well as changes in the markets for small dollar products. The DOD concludes that the MLA regulations need to be amended, but that simply extending the definition of covered credit products is not sufficient. The DOD is therefore “redrafting” the MLA regulations and plans to take a more “comprehensive approach” that could cover all short-term, small dollar credit products under the MLA regulations and provide exceptions as appropriate. Notably, the FY 2013 NDAA also clarified the CFPB’s enforcement authority under the MLA and granted the CFPB an opportunity to influence the content of the MLA regulations by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections.
On March 6, the CFPB released a “snapshot” of servicemember complaints prepared by the Office of Servicemember Affairs (OSA), which analyzes the military consumer complaints received since July 2011. According to the report, servicemembers, veterans, and their families have submitted 14,100 complaints to the Bureau since its opening and have recovered more than $1 million. The volume of servicemember complaints has continued to increase over time, rising 148% from 2012 to 2013.
Notably, although “debt collection” was not added as a complaint category until July 2013, approximately 3,800 complaints received relate to collection practices. Nearly half of these complaints concern attempts to collect non-existent debts, with the remainder concerning improper collection tactics and procedural issues related to collection. The category that received the most complaints—approximately 4,700—was mortgage. Concerns raised relate primarily to practices undertaken when a borrower defaults, but also to loan origination and making payments. The remainder of the complaints received relate to consumer loans, private student loans, payday loans, credit cards, credit reporting, banking services, and money transfers. Along with debt collection practices, the report identifies payday loans—and specifically, compliance with the Military Lending Act’s interest-rate restrictions—as a point of focus for OSA.
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month. Read more…
On September 17, the CFPB released revised short-term, small-dollar lending Examination Procedures that incorporate the regulations issued by the Department of Defense (DoD) to implemente the Military Lending Act (MLA), which addresses alleged predatory lending practices by lenders that operate near military bases. The CFPB was given explicit power to enforce the MLA in the National Defense Authorization Act for Fiscal Year 2013.
The revised Procedures note that the MLA covers active-duty military members and their dependents and applies to “consumer credit,” defined as closed-end loans that are payday loans with a term of 91 days or fewer and an amount financed of $2,000 or less as well as certain vehicle title loans and tax refund anticipation loans. The revised Manual notes the special requirements of the MLA, including: (i) capping the Military Annual Percentage Rate (the APR under TILA plus other charges such as credit insurance premiums and fees for certain credit-related ancillary products) at 36 percent; (ii) prohibiting a lender from holding a post-dated personal check, debit authorization, or title to a vehicle for repayment or security; (iii) prohibiting mandatory arbitration clauses and waivers of legal rights under the SCRA or other consumer protection laws; (iv) prohibiting lenders from rolling over loans, unless the new transaction results in more favorable terms for the consumer; (v) prohibiting lenders from requiring consumers to pay through the military wage allotment system; and (vi) prohibiting prepayment penalties.
The CFPB’s press release notes the Bureau’s ongoing coordination with the Department of Defense on servicemember protection, as described in the agencies’ 2012 Joint Statement of Principles on small-dollar lending.
The interest of regulators and enforcement authorities in short-term, small-dollar credit products – including payday loans, advance deposit products, installment loans, and more – has intensified in 2013. State and federal authorities have taken numerous actions to enforce existing law and to develop new rules for these products.
Earlier this year we reported on the DOJ’s prioritization of this area of consumer finance, and we have since reported on many other state and federal developments, including those related to state enforcement of licensing and usury laws against online lenders, federal regulators’ scrutiny of advance deposit products and payday loans, congressional interest in small dollar loans (here and here), and the Department of Defense’s potential expansion of the Military Lending Act.
With regard to this last issue, BuckleySandler Partners Kirk Jensen and Valerie Hletko recently examined the DOD’s advance notice of proposed rulemaking related to installment loans used by members of the armed forces and their families. The authors point out that the DOD’s interest in installment loans is emblematic of the scrutiny of short-term, small-dollar credit products, which appear to be increasingly vexing to regulators who recognize widespread demand for them but are concerned that such products may create a high-cost borrowing cycle.
On August 1, six banking industry trade groups submitted a joint comment letter relating to a proposal by the Department of Defense (DOD) to revise protections under the Military Lending Act (MLA), which apply to consumer credit extended to members of the military and their families. Among other things, the MLA caps the annual interest on short-term, small-dollar loans — including certain payday, car title, and refund anticipation loans. The MLA does not currently include credit cards, bank loans secured by funds on deposit, installment loans, or open-end credit.
In June, the DOD issued an advanced notice of proposed rulemaking (ANPR) to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the MLA, which would significantly broaden its application. The ANPR sought comment on whether the definition of “consumer credit” should be revised to expand coverage of the MLA to additional small-dollar loan products. The trade groups suggest that expanding coverage would be redundant, costly, and confusing in light of the “well-established system of financial protections for consumers [that] exists beyond the [MLA].” In other words, there is no need to create an entirely separate class of credit products for servicemembers and their families not directly related to military service.
The trade groups specifically identify several potential negative consequences of expanded coverage, including reduced access to installment loans and other credit products, and inability to refinance existing credit. On balance, the trade groups view the current rules — adopted after plenary discussion and careful consideration by all stakeholders — to be effective in achieving the proper balance between protecting military families and ensuring their access to credit. Thirteen state attorneys general took an opposing view in a comment letter submitted on June 24.
For additional commentary on the ANPR, please see the recent article from BuckleySandler Partners Kirk Jensen and Valerie Hletko.
Last week, the Department of Defense (DOD) issued an advanced notice of proposed rulemaking to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the Military Lending Act (MLA). Currently, the MLA regulations cover certain payday, car title, and refund anticipation loans to servicemembers and their dependents. The DOD notice seeks (i) comment on whether the definition of “consumer credit” should be revised to cover other small dollar loans and (ii) examples of alternative programs designed to assist servicemembers who need small dollar loans. Responses to the DOD notice are due by August 1, 2013. On June 24, a bipartisan group of 13 state attorneys general submitted a comment letter urging the DOD to amend the MLA regulations to close loopholes in the definitions of covered loans and to cover any other type of consumer credit loan presenting similar dangers, such as overdraft loans.
On January 2, President Obama signed H.R. 4310, the National Defense Authorization Act (NDAA) for Fiscal Year 2013, which includes provisions that enhance federal enforcement of the Military Lending Act (MLA). The MLA (i) caps the annual interest on certain loans to servicemembers at 36 percent, (ii) prohibits such loans from being secured with a personal check, debit authorization, car title, or wage allotment, and (iii) includes other servicemember protections related to the offering of consumer credit. The MLA generally covers short-term, small dollar loans, including payday, car title, and refund anticipation loans, but, pursuant to DOD regulations, excludes credit cards, overdraft loans, military installment loans, and all forms of open-end credit. By amending the MLA to state that the same regulators that enforce the Truth in Lending Act now have administrative authority to enforce consumer credit protections for servicemembers and their dependents under the MLA, the NDAA (Secs. 661-663) makes clear that the CFPB has enforcement authority under the MLA. Further, the bill gives the CFPB an opportunity to influence implementation of the MLA regulations, including their scope, by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections, and by requiring that such consultation occur at least every two years. These changes add new force to the MLA and provide additional legislative support for the CFPB and DOD to collaborate on servicemember protection issues. The CFPB and DOD already have collaborated on issues related to, for example, fraud protection and student lending. The bill also adds a civil liability section to the MLA, which permits private actions to obtain actual damages (but not less than $500 per violation), as well as punitive damages. Finally, the bill simplifies the definition of dependents protected under the MLA.