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Financial Services Law Insights and Observations


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  • District Court says MLA’s statute of limitations begins upon discovery of facts


    The U.S. District Court for the Eastern District of Virginia recently granted an installment lender’s motion to dismiss, ruling that most of the class members’ claims are time-barred by the Military Lending Act’s (MLA) two-year statute of limitations. Plaintiffs are active duty servicemembers who entered into installment loans with the defendant. Claiming four violations of the MLA, plaintiffs alleged the defendant (i) extended loans with interest rates exceeding the MLA’s 36 percent interest rate cap; (ii) extended loans that involved roll overs of prior loans; (iii) required plaintiffs to agree to repayment by allotment (with a backup preauthorized electronic fund transfer) as a condition to receiving a loan; and (iv) required plaintiffs to provide a security interest in their bank accounts as a condition for receiving a loan. Plaintiff sought to certify a class covering the five years preceding the date the complaint was filed. Defendant moved to dismiss, arguing that plaintiffs have only been harmed by technical violations of the MLA and did not suffer a concrete injury. Plaintiffs countered that the defendant’s MLA violations caused them to sustain injuries from making payments, including interest payments, “on loans that were ‘void from [their] inception’ [] due to their unlawful refinancing, allotment, and security interest requirements.”

    The court reviewed a significant issue raised by the parties’ differing interpretations of the MLA’s statute of limitations and its applicability to plaintiffs’ loans. Specifically, the parties disagreed as to whether “discovery by the plaintiff of the violation,” which triggers the two-year limitations period, requires that a plaintiff only discover the facts constituting the basis for the violation, as argued by the defendant, or instead requires that a plaintiff also know that the MLA was violated, as the plaintiffs argued. While acknowledging that the text in question is inconclusive, the court stated that since the MLA “does not require ‘discovery’ of both the ‘violation’ and ‘liability’ but only the ‘violation that is the basis for such liability,’ the text appears to support the interpretation that only discovery of the violative conduct is required, and

    not discovery of the actionability of that conduct.” The court also reviewed other federal statutory discovery rules where other courts “have consistently found that ‘discovery’ requires that a plaintiff have knowledge only of the facts constituting the violation and not the legal implications of those facts.” Relying on this, as well as other court interpretations, the court determined that “the two-year limitations period is triggered when a plaintiff discovers the facts

    constituting the basis for the MLA violation and not when the plaintiff recognizes that these facts

    support a legal claim.” Thus, the court found that most of the loans underlying the claims are time-barred.

    However, for loans that fell within the applicable limitations period, the court granted defendant’s motion to dismiss for failure to state a claim, concluding, among other things, that a creditor is not prohibited from taking a security interest in a plaintiff’s bank account by way of a preauthorized electronic fund transfer provided the military annual percentage rate does not exceed the allowable 36 percent (a claim, the court noted, plaintiffs dismissed and did not otherwise address). Moreover, the court determined that plaintiffs failed to allege that the defendant was a “creditor” under the narrower definition used by the MLA in its refinancing and roll-over prohibition or that the defendant’s “characterization of the convenience of repayment by allotment amounted to a misrepresentation or concealment of facts giving rise to plaintiffs’ MLA claim.”

    Courts State Issues Virginia Military Lending Act Consumer Finance Class Action Servicemembers Interest Rate

  • Divided 4th Circuit: Including GAP coverage does not eliminate auto loan exemption from MLA


    On April 12, a split U.S. Court of Appeals for the Fourth Circuit held that loans borrowed in part to finance the purchase of a car are not governed by the Military Lending Act (MLA), even when the loan covers additional related costs. While the MLA’s requirements apply to the extension of consumer credit to covered members, loans procured “for the express purpose of financing” the purchase of a car (and are secured by the car) are excluded from many of the statute’s protections. Plaintiff purchased a car with an auto loan that included guaranteed asset protection coverage (GAP). The plaintiff then filed a putative class action against the defendant claiming the loan violated the MLA because it mandated arbitration (which is prohibited under the MLA) and failed to disclose certain information. The plaintiff argued that the loan should be protected under the MLA because part of his “bundled” loan went to GAP coverage. The district court disagreed and dismissed the case, ruling that the plaintiff’s contract was exempt from the MLA because GAP coverage and other add-on charges were “inextricably tied” to his purchase of the car.

    On appeal, the majority concluded that loan, which was used for both an MLA-exempt and non-exempt purpose, can be treated together under the statute, because “[i]f a loan finances a car and related costs, then it is for the express purpose of financing the car purchase and the exception can apply.” The key issue was how to interpret the MLA exception that covers loans made for the “express purpose” of financing a car. “If that phrase, as used in the [MLA], means merely ‘for the specific purpose,’ [the defendant] wins. If it means ‘for the sole purpose,’ [plaintiff] wins,” the majority wrote. “We do not care and we do not ask” if the loan also financed GAP coverage, provided the loan was made for the specific purpose of financing a car, the court said, explaining that the loan is exempted from the MLA, “no matter what else it financed.”

    The dissenting judge warned that the majority’s conclusion undermines the purpose of the MLA. “There is no reason to suspect that Congress regulated the marketing of financial products to service members, only to allow them to be smuggled in through a vehicle-loan back door,” the dissenting judge wrote, criticizing the majority’s conclusion and noting that opening up the MLA’s exception to include additional loans “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan” at the expense to service members.

    Notably, the CFPB, DOJ, and Department of Defense (DOD) filed an amicus brief last year on behalf of the United States in support of the plaintiff’s appeal, in which the agencies argued that the “hybrid” loan at issue must comply with the MLA. As previously covered by InfoBytes, the agencies wrote that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car.” The agencies noted that GAP coverage is identified as a “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for [GAP] insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.

    Courts Appellate Fourth Circuit Consumer Finance Auto Finance GAP Fees Military Lending Military Lending Act Class Action

  • CFPB orders nonbank title lender to pay $15 million for numerous violations

    Federal Issues

    On February 23, the CFPB entered a consent order against a Georgia-based nonbank auto title lender (respondent) for alleged violations of the Military Lending Act (MLA), the Truth in Lending Act, and the Consumer Financial Protection Act. According to the Bureau, the respondent allegedly charged nearly three times the MLA’s 36 percent annual interest rate cap on auto title loans made to military families. The respondent also allegedly changed military borrowers’ personal information in an attempt to hide their protected status, included mandatory arbitration clauses and unreasonable notice provisions in its loans, and charged fees for an insurance product that provided no benefit to the borrower. The Bureau noted that the respondent has been under a consent order since 2016 for allegedly engaging in unfair and abusive acts related to its lending and debt collection practices (covered by InfoBytes here). While neither admitting nor denying any of the allegations, the respondent has agreed to pay $5.05 million in consumer redress and a $10 million penalty. The respondent must also implement robust measures to prevent future violations.

    Federal Issues CFPB Enforcement Auto Finance Military Lending Act Consumer Finance Nonbank Repeat Offender Title Loans UDAAP CFPA Unfair Abusive

  • FTC, CFPB weigh in on servicemembers’ right to sue under the MLA


    On November 22, the FTC and CFPB (agencies) announced the filing of a joint amicus brief with the U.S. Court of Appeals for the Eleventh Circuit seeking the reversal of a district court’s decision that denied servicemembers the right to sue to invalidate a contract that allegedly violated the Military Lending Act (MLA). (See corresponding CFPB blog post here.) The agencies countered that the plain text of the MLA allows servicemembers to enforce their rights in court. Specifically, the agencies argued that Congress made it clear that when a lender extends a loan to a servicemember that fails to comply with the MLA, the loan is rendered void in its entirety. Moreover, Congress amended the MLA to unambiguously provide servicemembers certain legal rights, including an express private right of action and “the right to rescind and seek restitution on a contract void under the criteria of the statute.”

    The case involves an active-duty servicemember and his spouse who financed the purchase of a timeshare from the defendants. Plaintiffs entered into an agreement with the defendants, made a down payment, and agreed to pay the remaining balance in monthly installments carrying an interest rate of 16.99 percent, in addition to annual assessments and club dues. None of the loan documents provided to the plaintiffs discussed the military annual percentage rate, nor did the defendants make any supplemental oral disclosures. Additionally, the agreement contained a mandatory arbitration clause (the MLA prohibits creditors from requiring servicemembers to submit to arbitration) and purportedly waived plaintiffs’ right to pursue a class action and their right to a jury trial. Plaintiffs filed a putative class action lawsuit alleging the agreement violated the MLA on several grounds, and sought an order declaring the agreement void. Plaintiffs also sought recission of the agreement, restitution, statutory, actual, and punitive damages, and an injunction requiring defendants to comply with the MLA going forward.

    Defendants moved to dismiss, countering “that the plaintiffs lacked standing because they had not suffered any concrete injury and, even if they had, whatever injury they suffered was not traceable to the alleged MLA violations.” Defendants also argued that the loan was exempt under the MLA’s exemption for residential mortgages, and claimed that the MLA does not authorize statutory damages, nor did the plaintiffs state a claim for declaratory or injunctive relief. Further, defendants stated the court lacked jurisdiction to hear the case. The district court dismissed the lawsuit for lack of standing, agreeing with the magistrate judge that, among other things, plaintiffs “failed to allege ‘that the inclusion of the arbitration provision impacted [their] decision to accept the contract,’ and that they could not ‘seek[] relief based on a mere technicality that has not impacted them in any way.’”

    Disagreeing with the district court’s ruling, the agencies argued that plaintiffs have a legal right to challenge the contract in court because (i) they made a down payment on an illegal and void loan; (ii) the injuries are traceable to the challenged conduct since “their monetary losses are the product of the illegal and void loan"; and (iii) their injuries “are redressable by an order of the court awarding restitution for the amounts that plaintiffs have already paid on the loan, and by a declaration confirming that the loan is void and that the plaintiffs have no obligation to make additional payments going forward.” The agencies asserted that courts have recognized that economic injury is exactly the sort of injury that courts have the power to redress. 

    Moreover, the agencies pointed out that the district court’s ruling “risks substantially curtailing private enforcement of the MLA and limiting servicemembers’ ability to vindicate their rights under the statute. It does so by reading the MLA’s voiding provision out of the statute and reading into the statute an atextual materiality requirement. But it may be very difficult, if not impossible, for servicemembers to demonstrate that certain MLA violations had a direct effect on their decision to procure a financial product or caused them to pay money they would not otherwise have paid.”

    Courts FTC CFPB Servicemembers Military Lending Act Appellate Eleventh Circuit Consumer Finance Disclosures Arbitration

  • California amends protections for servicemembers and veterans

    State Issues

    On September 27, the California governor signed SB 1311 to enact the Military and Veteran Consumer Protection Act of 2022. The Act updates several provisions related to servicemembers and veterans, including amending existing law to provide that a person will be liable for an additional civil penalty of up to $2,500 for each violation if the person engages in “unfair competition, including any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising,” against one or more servicemembers or veterans. Additionally, the Act amends certain provisions related to enforcement of the federal Military Lending Act (MLA). Specifically, the bill makes “any security interest in personal property other than a motor vehicle, off-highway vehicle, trailer, or aircraft void if it would cause a loan procured by specified service members in the course of purchasing the personal property to be exempt from the [MLA].” The Act also makes “any security interest in a motor vehicle void if it would cause a loan procured by specified service members in the course of purchasing the motor vehicle to be exempt from the [MLA] and the loan also funds the purchase of a credit insurance product or credit-related ancillary product.” The Act takes effect January 1, 2023.

    State Issues State Legislation California Military Lending Act Servicemembers Consumer Finance

  • CFPB sues online lender to servicemembers

    Federal Issues

    On September 29, the CFPB filed a complaint against a New York-based online lender and 38 of its subsidiaries for allegedly violating the Military Lending Act (MLA) and the Consumer Financial Protection Act by imposing excessive charges on loans to servicemembers and their dependents. The Bureau alleges that the defendants required consumers to join its membership program and pay monthly membership fees ranging from $19.99 to $29 to access certain “low-APR” installment loans. The complaint says that when the membership fees are combined with loan-interest-rate charges, the total fees exceed the MLA’s allowable rate cap, contending that the MLA serves to protect active duty servicemembers and their dependents by limiting the APR applicable to extensions of credit to 36 percent. The Bureau further claims that the defendants deceived consumers by representing that they owed loan payments and fees that were actually void under the MLA. In addition, the Bureau claims that the defendants refused to allow customers to cancel their memberships and stop paying monthly fees until their loans were paid, despite leading many consumers to believe they could cancel their memberships for any reason at any time, thereby “avoid[ing] such automatic renewals and associated membership fees.” In certain cases, the defendants refused to cancel memberships if a consumer had unpaid membership fees even if the loan was paid off, the Bureau says. The Bureau is seeking permanent injunctive relief, damages, restitution, disgorgement, civil money penalties, and other relief.

    Federal Issues CFPB Enforcement Online Lending Servicemembers Consumer Finance Fees Military Lending Act CFPA Fintech

  • Agencies file amicus brief on “hybrid” loan MLA protections


    On January 6, the CFPB, DOJ, and DOD filed an amicus brief on behalf of the United States in support of a consumer servicemember plaintiff’s appeal in Jerry Davidson v. United Auto Credit Corp, arguing that the hybrid loan at issue in the case, which was used for both an MLA-exempt and non-exempt purpose, must comply with the MLA. The loan included an amount used to purchase Guaranteed Auto Protection (GAP) insurance coverage, and the plaintiff alleged that, among other things, the auto lender (defendant) violated the MLA by forcing the plaintiff to waive important legal rights as a condition of accepting the loan and by requiring him to agree to mandatory arbitration should any dispute arise related to the loan. The plaintiff also alleged that the defendant failed to accurately communicate his repayment obligations by failing to disclose the correct annual percentage rate. The case is before the U.S. Court of Appeals for the Fourth Circuit after a district court held that the plaintiff’s GAP insurance fell within the car-loan exception to the MLA as “inextricably tied to” and “directly related” to the vehicle purchase.

    Arguing that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car,” the agencies’ brief noted that GAP coverage is identified as “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for Guaranteed Auto Protection insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.

    Courts CFPB Department of Defense DOJ Amicus Brief Appellate Fourth Circuit Servicemembers Military Lending Act Military Lending GAP Fees

  • CFPB sues pawn lenders for MLA violations

    Federal Issues

    On November 12, the CFPB filed a complaint against a Texas-based pawn lender and its wholly owned subsidiary (together, “lenders”) for allegedly violating the Military Lending Act (MLA) by charging active-duty servicemembers and their dependents more than the allowable 36 percent annual percentage rate on pawn loans. According to the Bureau, between June 2017 and May 2021, the two lenders together allegedly made more than 3,600 pawn loans carrying APRs that “frequently exceeded” 200 percent to more than 1,000 covered borrowers. The Bureau further claimed that the lenders failed to make all loan disclosures required by the MLA and forced borrowers to waive their ability to sue. The identified 3,600 pawn loans only represent a limited period for which the Bureau has transactional data, the complaint stated, adding that the pawn stores located in Arizona, Nevada, Utah, and Washington that originated these loans only comprise roughly 10 percent of the Texas lender’s nationwide pawn-loan transactions. As such, that Bureau alleged that the lenders—together with their other wholly owned subsidiaries—made additional pawn loans in violation of the MLA from stores in these and other states. The Bureau seeks injunctive relief, consumer restitution, disgorgement, civil money penalties, and other relief, including a court order enjoining the lenders from collecting on the allegedly illegal loans and from selling or assigning such debts.

    As previously covered by InfoBytes, the Bureau issued a prior consent order against an affiliated lender in 2013, which required the payment of $14 million in consumer redress and a $5 million civil money penalty. The affiliated lender was also ordered to cease its MLA violations. In its current action, the Bureau noted that because the Texas lender (who was not identified in the 2013 action) is a successor to the prior affiliated lender, it is therefore subject to the 2013 order. Accordingly, the Bureau alleged that the Texas lender’s violations of the MLA also violated the 2013 order.

    Federal Issues CFPB Enforcement Military Lending Military Lending Act Consumer Finance Interest Rate APR Nonbank CFPA Servicemembers

  • States, consumer advocates urge agencies to explicitly disavow rent-a-bank schemes

    Federal Issues

    On October 18, consumer advocates and several state attorneys general and financial regulators responded to a request for comments issued by the OCC, Federal Reserve Board, and the FDIC on proposed interagency guidance designed to aid banking organizations in managing risks related to third-party relationships, including relationships with fintech-focused entities. (See letters here and here.) As previously covered by InfoBytes, the proposed guidance addressed key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Consumer advocates and the states, however, expressed concerns that the agencies’ proposed guidance does not “highlight the significant risks associated with high-cost lending involving third-party relationships,” and does not include measures to prevent banks from entering into nonbank lending partnerships (e.g. “rent-a-bank schemes”).

    According to the consumer advocates’ letter, the agencies’ guidance “should unequivocally declare that it is inappropriate for a bank to rent out its charter to enable attempted avoidance of state consumer protection laws, in particular interest rate and fee caps, or state oversight through licensing regimes.” The consumer advocates stated that they are aware of six FDIC-supervised banks involved in rent-a-bank schemes with nonbank lenders making allegedly illegal high-cost loans, and urged the FDIC to take immediate, “overdue” action to put an end to them. Among other things, the consumer advocates said the new guidance should explicitly specify: (i) that a bank’s involvement in lending that exceeds state interest rate limits with a nonbank is a “critical activity”; (ii) that lending partnerships involving loans exceeding a fee-inclusive 36 percent annual percentage rate (APR) “pose especially high risks”; and (iii) that in instances where a loan exceeds the Military Lending Act’s 36 percent APR, the federal banking supervisor will directly examine the third-party partner and charge the bank for the cost of the examination.

    The states wrote in their letter that “experience teaches us that, in the absence of an explicit disavowal of rent-a-bank schemes, the [p]roposed [g]uidance invites continued abuse of banks’ interest exportation rights, to the considerable detriment of state regulation, consumer protection, and banks’ safety and soundness.” The states strongly encouraged the agencies to “explicitly disavow rent-a-bank schemes.”

    Federal Issues Bank Partnership Rent-a-Bank State Regulators State Issues State Attorney General Bank Regulatory Third-Party Risk Management Third-Party FDIC OCC Federal Reserve Consumer Finance Military Lending Act

  • DoD releases MLA report

    Agency Rule-Making & Guidance

    Recently, the Department of Defense (DoD), in consultation with the Treasury Department, released a report to the House Committee on Armed Services in response to Title V of House Report 116-442 on the National Defense Authorization Act (NDAA) for Fiscal Year 202. The House Report requested a report regarding the Military Annual Percentage Rate (MAPR), which cannot exceed 36 percent as established under the Military Lending Act (MLA) and what impact lowering the MAPR to 30 percent would have on military readiness and servicemember retention. Some highlights of the report include, among other things: (i) “the MLA, in combination with the Department’s ongoing financial literacy education and financial counseling efforts, appears to be effective in deterring unfair credit practices”; (ii) the DoD does not take a position regarding the merit of any change to decrease the maximum MAPR rate below 30 percent; (iii) credit cards, auto loans, and personal loans are generally available at risk-based rates below the MAPR; (iv) almost a quarter of all active duty servicemembers in the U.S. are stationed in states that limit a 24 month, $2,000 loan to less than 30 percent; and (v) “a MAPR limit as low as 28 percent would likely have no impact on [servicemembers]’ access to credit cards, assuming credit card issuers meet exemptions for eligible bona fide fees when calculating the MAPR.” The report notes that the DoD “is committed to continue working with Congress to support the financial readiness of [servicemembers] and their families and is willing to provide comment on any such proposal when appropriate.”

    Agency Rule-Making & Guidance Department of Defense Military Lending Act Military Lending Department of Treasury U.S. House


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