On November 22, 2022, the Consumer Financial Protection Bureau (“CFPB”) and the Federal Trade Commission (“FTC”) filed an amicus brief in a case involving the right of servicemembers to sue under the Military Lending Act (“MLA”).  In the brief, the agencies ask the Eleventh Circuit to overturn a district court decision that held the plaintiffs (a servicemember and his wife) did not have a right to sue under the MLA because they had not suffered a concrete injury sufficient to confer standing.

The MLA and its implementing regulations contain protections for servicemembers and their dependents who are identified at origination of certain credit transactions as “covered borrowers.”  These protections include a maximum Military Annual Percentage Rate (“MAPR”) of 36%, a prohibition against requiring arbitration, and mandatory loan disclosures. 10 U.S.C. § 987(b), (c), (e)(3); 32 C.F.R. §§ 232.4(b), 232.6, 232.8(c).  In their class action complaint filed in the U.S. District Court for the Southern District of Florida, the plaintiffs alleged that the defendant failed to provide them with protections required under the MLA because it did not check if they were “covered borrowers” prior to extending credit.

In its motion to dismiss the complaint, defendant argued, among other things, that the plaintiffs did not have standing because they had not adequately alleged any resulting injury.  In dismissing the case, the district court found that even if there was a technical MLA violation, there was no concrete injury to the plaintiffs directly or indirectly resulting from it.

On appeal, the plaintiff-appellants present the issue as one fundamental to the MLA and contract law generally:  Do parties who are purportedly obligated to pay money under a void contract have standing to sue to rescind that contract and to seek restitution of any payments already made?  A respondent’s brief has not yet been filed.

In their joint amicus brief, the CFPB and FTC argue that the plaintiffs suffered an injury-in-fact when they made payments under an illegal contract, and that the injuries are traceable to the illegal contract and redressable by a court order compensating the plaintiffs for financial losses suffered and clarifying their ongoing legal obligations.  Perhaps most importantly, the two agencies argue that the district court’s decision undermines the MLA’s remedial purposes, which includes a private right of action and a broad array of remedies in addition to rendering a contract void if it is non-compliant. 10 U.S.C. § 987(f)(5).  According to the CFPB and FTC:

There is no doubt then that Congress intended for servicemembers to bring suit to challenge the legality of contracts that violate the MLA and to demand the remedies to which they are entitled under the statute.  The district court’s holding, however, 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.

CFPB/FTC Amicus Brief at 29.

In addition to the amicus brief filed by the FTC and CFPB, an amicus brief supporting the plaintiffs has been filed by the Military Officers Association of America (“MOAA”) and several other military and legal aid organizations.  These groups argue that the MLA has been incredibly effective precisely because it voids agreements that do not meet its requirements,  and that a contrary ruling puts servicemembers and our country at risk during a time of record recruiting shortfalls.  The groups further assert in their brief that, “If this decision is not reversed, predatory lenders will realize they can return to military bases en masse, ignore all of the MLA’s protections, and only have to worry about lawsuits from the small minority of victims able to prove reliance on specific statutory violations.”  MOAA Amicus Brief at 6.

Section 987(f)(3) of the MLA provides that “[a]ny credit agreement, promissory note, or other contract prohibited [by the MLA] is void from the inception of such contract.” 10 U.S.C. § 987(f)(3).  While the MLA is clear on its face, the district court, based on Spokeo v. Robins, nevertheless rejected the notion that contracts are automatically void if they fail to comply with the MLA.  In Spokeo, the Supreme Court held that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” 578 U.S. at 341.  The district court observed that this principle was reaffirmed in TransUnion LLC v. Ramirez, where the Supreme Court explained that Congressional authorization of suits alleging only statutory violations without any injury “would flout constitutional text, history, and precedent.” 141 S. Ct. 2190, 2206 (2021).  It remains to be seen whether the Eleventh Circuit will differentiate the failure to comply with the MLA’s requirements from the Fair Credit Reporting Act violations for which concrete injury was lacking in Spokeo and Ramirez.

If the decision is upheld on appeal, it will provide a legal defense for creditors for technical MLA violations in private lawsuits where plaintiffs cannot show concrete harm, such as a failure to provide a mandatory disclosure about the MAPR for loans to covered borrowers with an MAPR that does not exceed the 36% cap.  We would caution, however, that the decision would only be binding in the Eleventh Circuit and, perhaps more importantly, that the CFPB and other regulators are unlikely to recognize this defense in MLA enforcement actions.