As anticipated, the Department of Defense’s proposed regulations to implement provisions of the Military Loan Act added by the 2013 Defense Authorization Bill would significantly expand MLA coverage. The proposed revisions would limit interest charged to servicemembers and their dependents on all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards and require creditors to screen all applicants against a DoD database before offering such products with rates greater than 36 percent. If adopted, the rule would increase significantly the regulatory and litigation risks that lenders face because the 2013 MLA amendments also included a new civil liability provision that allows private actions for MLA violations to be filed in federal court.
In its current form, the MLA rule covers only three types of consumer credit: closed-end payday loans with a term of 91 days or fewer in which the amount financed does not exceed $2,000; closed-end vehicle title loans with a term of 181 days or fewer, and closed-end tax refund anticipation loans. The MLA rule provides protections to a consumer who is a servicemember or the dependent of a servicemember at the time he or she becomes obligated on certain types of consumer credit transactions, such as limiting interest to 36 percent, prohibiting arbitration and prepayment penalties, and requiring delivery of special disclosures before consummation of the transaction (including oral disclosures, which in certain instances may be satisfied by providing a toll-free telephone number the consumer may call to receive the disclosures).
In developing the proposal, the DoD consulted with the CFPB as well as the FTC and federal banking regulators. Following the DoD’s release of the proposal, Director Cordray issued a statement praising the proposal in which he stated that it “would shut down the predatory lending to the military that has flourished through exploiting legal technicalities. By broadening the types of credit covered under the law, this proposal would carry out the will of Congress by enabling the CFPB to stop lenders from harming servicemembers in ways the law was intended to stop.” Assuming Director Cordray had in mind the CFPB’s ability under the proposal to stop lenders from using pre-dispute arbitration agreements on more MLA-covered loans, might he be signaling the direction of the CFPB’s arbitration study that is expected to be concluded in December?
For more on the DoD’s proposal, see our legal alert.