In dismissing a class action last month alleging violations of the Military Lending Act (“MLA”), a federal district court in Virginia held that the MLA’s two-year statute of limitations is triggered by discovery of the facts underlying the violation, not by discovery that the MLA had been violated.  Finding the MLA’s text to be inconclusive on this issue, the court looked to case law interpreting a similar statute of limitations in the Fair Credit Reporting Act (“FCRA”) for guidance.

The plaintiffs in Wood v. Omni Financial of Nevada, Inc. alleged in an amended complaint that Omni Financial of Nevada, Inc. (“Omni”) charged interest rates that exceeded the 36% military annual percentage rate (“MAPR”) cap, extended loans that rolled over prior loans, conditioned payment of loans through military allotment, and required borrowers to provide a security interest in their bank accounts as a condition for receiving loans.  Omni moved to dismiss the complaint for lack of standing and for failure to state a claim.

In its May 31, 2023 decision, the court denied Omni’s motion to dismiss for lack of standing, finding plaintiffs had sufficiently alleged a concrete injury under the MLA in light of unlawful repayment conditions and loan terms; however, the court granted Omni’s motion to dismiss for failure to state a claim, finding the plaintiffs’ MLA claims regarding the majority of the loans at issue were time-barred by the two-year statute of limitations.

The MLA provides that:

An action for civil liability under this paragraph may be brought in any appropriate United States district court, without regard to the amount in controversy, or in any other court of competent jurisdiction, not later than the earlier of—(i) two years after the date of discovery by the plaintiff of the violation that is the basis for such liability; or (ii) five years after the date on which the violation that is the basis for such liability occurs.

10 U.S.C. § 987(f)(5)(E) (emphasis added).

According to the court, the MLA’s two-year discovery provision is properly viewed as a statute of limitations, whereas the five-year provision is considered a statute of repose, which limits the time to file a claim in the absence of discovery.  Finding the text of the discovery provision inconclusive, the court sided with the defendant’s interpretation that the provision looks to whether a plaintiff has discovered the facts constituting the basis for the violation and not whether there has been a MLA violation.

Looking to an identical statute of limitations provision in the FCRA, the court found that all courts that have considered the issue have found that knowledge of the law was not required to trigger the two-year limitations period, and that a cause of action accrues as soon as a plaintiff became aware or should have become aware of an injury, not when the plaintiff knows or should know that such injury constitutes a legal wrong.  Applying the statute of limitations to the named plaintiffs’ claims, the court found some claims were completely time-barred by the MLA’s five-year statute of repose and others were time-barred by the two-year statute of limitations because the plaintiffs knew of the alleged facts that constituted MLA violations – including the MAPR, rollover of loans, repayment by allotment, and granting of a security interest – when they entered into the loans.

The court also found grounds to dismiss claims that were not time-barred, including roll-over claims on a 2022 loan, finding the amended complaint failed to sufficiently allege that Omni was a “creditor” within the meaning of 32 C.F.R. § 232.8(a), which required a creditor to be engaged in the business of payday lending or deferred presentment transactions.  Likewise, the court found that the facts pled in support of the allotment and security interest claims did not run afoul of the MLA — the remaining loans (as to which the plaintiffs’ MLA claims were not time-barred) were not repaid by allotment and plaintiffs’ failed to allege that the MAPR exceeded 36% on those loans.  This allegation was necessary to allege an MLA violation, as a creditor is not prohibited from taking a security interest where the MAPR does not exceed 36%.

This is not the first time that Omni has dealt with allegations of MLA violations.  In December 2020, Omni entered into a consent order with the Consumer Financial Protection Bureau (“CFPB”), settling allegations that the lender had violated the MLA by requiring repayment of loans to MLA covered borrowers by military allotment.  According to the CFPB, more than 99% of servicemembers who received loans from Omni agreed to do so.  Additionally, the CFPB alleged that Omni violated the Electronic Funds Transfer Act by conditioning extensions of credit to borrowers not covered by the MLA on their agreement to repay by preauthorized electronic fund transfers.  The consent order required Omni to pay a civil monetary penalty in the amount of $2,175,000 and prohibited it from requiring covered servicemembers or their dependents to repay loans by allotment or conditioning any loan on a borrower’s agreement to repay with a preauthorized electronic fund transfer.  The CFPB has focused on abuse of military allotments, highlighting the issue last year in a blog post.

The court’s decision in this case is significant as the facts supporting many potential MLA violations, such as violations of the MAPR or the MLA prohibition of compulsory arbitration, are evident at origination of most consumer credit agreements.  As such, other courts adopting the decision’s holding should find that MLA claims not brought within two years of a consumer entering into a credit agreement are time-barred.