On September 19, 2018, California enacted AB-3212.  The Bill amends the California Military and Veterans Code to expand the protections offered to qualifying servicemembers under state law and to impose new criminal penalties for certain violations of its provisions.  Some of the key changes, which go into effect January 1, 2019, are as follows:

Expanded Protections

  • Extends most protections to 120 days after military service ends (prior provision extended protections for 60 days after the end of military service).
  • Expands the 6% interest rate cap to include student loans, with the 6% rate to remain in effect for one year after the period of military service ends.
  • Extends the ability to defer payments on certain obligations to include student loans.
  • Clarifies that interest in excess of 6 percent per year that would otherwise be incurred but for the interest rate cap is “forgiven” and periodic payments “shall be reduced by the amount of interest forgiven”.
  • Extends the right to terminate leases after entry into military service to include vehicle leases.
  • Clarifies that penalties may not be imposed on the nonpayment of principal or interest during the period in which payments are deferred on an obligation pursuant to a court order.

Written Response Required

  • Requires a person receiving a request for relief from a servicemember to respond within 30 days acknowledging the request, setting forth any reasons the person believes the request is incomplete or the servicemember is not entitled to the relief requested, specifying the specific information or materials that are missing from the request, and providing contact information the servicemember can use to contact the person regarding the request. If after receiving a request from the servicemember, the recipient does not respond within 30 days, the recipient waives any objection to the request and the servicemember is automatically entitled to the relief sought.

Prohibitions on Sales, Foreclosures, and Seizures of Property

  • Extends the bar on sale, foreclosure, or seizure of property for non-payment to the period of military service plus one year (prior provision was for the period of nine months after the end of military service).
  • Extends the bar on enforcing storage liens during the period of military service and for 120 days thereafter (prior provision was until three months after the end of military service).
  • Requires a sworn statement of compliance by any person who files or completes a notice, application or certification of lien sale or certificate of repossession.

Protections Related to Court Proceedings

  • Extends the ability of courts to stay proceedings involving servicemembers as a plaintiff or defendant to 120 days after the end of the military service (prior provision was until 60 days after the end of military service).
  • Permits a service member who is granted an initial stay to apply for an additional stay by showing there is a “continuing military effect” on the servicemember’s ability to appear. If the court refuses to grant an additional stay, the court shall appoint counsel to represent the servicemember in the proceeding.
  • Requires courts to stay for a minimum period of 90 days any proceedings in which (a) there may be a defense to the action that cannot be presented without the presence of the servicemember defendant; or (b) counsel cannot after due diligence contact the servicemember defendant to determine if a meritorious defense exists.
  • Limits the ability of a court-appointed attorney to waive defenses that a servicemember may have or to otherwise bind the servicemember whenever the attorney cannot locate the servicemember through a new statutory provision.

Credit Reporting

  • Prohibits a creditor or consumer reporting agency from making an annotation in the servicemember’s record that the person is on active duty status. A violation of this provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.

Debt Collections

  • Prevents a debt collector from falsely claiming to be a member of the military in attempting to collect any obligation. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.
  • Expressly prohibits a debt collector from contacting the servicemember’s military unit or chain of command in connection with the collection of any obligation unless the debt collector obtains written consent from the servicemember after the obligation becomes due and payable. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.

Scope of Coverage

These provisions in the California Military and Veterans Code apply broadly to members of the Armed Forces (Army, Navy, Air Force, Marine Corps, and Coast Guard) who are on active duty as well as any member of the state militia (defined as the National Guard, State Military Reserve and the Naval Militia) who are on full-time active state service or full-time active federal service.  Creditors are advised to consult with counsel to determine whether these new provisions will apply to specific servicemember borrowers who have contacts with California.

NPR reported last week that the Trump Administration is planning to end the current prohibition under the Military Lending Act (“MLA”) against creditors offering service members GAP insurance in connection with credit intended to finance the purchase of motor vehicles. Current interpretive guidance concerning the Department of Defense’s regulations implementing the MLA prohibits creditors from financing GAP insurance – insurance that covers the difference in the actual cash value of a motor vehicle and the balance still owed on the financing – in purchase money transactions with protected service members and their dependents.

Neither the MLA nor its implementing regulations expressly prohibit creditors from financing additional items, such as GAP insurance, when financing the purchase of a motor vehicle. Therefore, the current interpretive guidance, which took effect immediately and was issued without notice or an opportunity to comment, caused considerable chaos in the auto finance industry as creditors scrambled to figure out whether they could continue to offer MLA-compliant financing to service members.

Because certain financial products require a borrower to have GAP insurance, industry groups have argued that the GAP prohibition has effectively caused the unavailability of certain financing options for service members. This raises potential fair lending concerns in states that prohibit discrimination against service members in credit or other commercial transactions. Further, service members may be less likely to obtain GAP insurance when there is no option to finance the insurance as part of the transaction, raising concerns that military families may face greater hardship when a vehicle is lost or destroyed – through theft, accident, or natural disaster.

These planned changes to MLA guidance come on the heels of the CFPB’s announcement last week that it has suspended routine supervisory examinations for MLA compliance.

In response to reports that Acting CFPB Director Mick Mulvaney intends to dispense with routine supervisory examinations of creditors for violations of the Military Lending Act (MLA), Senate Democrats sent a joint letter addressed to Mulvaney in his capacity as Director of the Office of Management and Budget—urging him to reconsider.

The letter, signed by all 49 Democratic Senators, takes the position that the CFPB has statutory authority to conduct examinations for MLA compliance:

We write regarding reports that the Consumer Financial Protection Bureau (CFPB) will no longer protect servicemembers and their families by including the Military Lending Act (MLA) as part of the CFPB’s routine lender examinations due to a purported lack of authority.  These reports are puzzling because the CFPB already possesses the authority to enforce the MLA and examine many types of lenders for the purposes of “detecting and assessing risks to consumers and to markets for consumer financial products and services.”

The apparent statutory basis for this view is the quoted language above, which is from Section 1024(b)(C) of the Dodd-Frank Act (12 U.S.C. § 5514 – Supervision of nondepository covered persons). Reading Section 1024(b) in its entirely, we think the interpretation set forth in the senators’ letter misreads the scope of supervisory authority authorized by Dodd-Frank:

(b) SUPERVISION.—
(1) IN GENERAL.—The Bureau shall require reports and conduct examinations on a periodic basis of persons described in subsection (a)(1) for purposes of—
(A) assessing compliance with the requirements of Federal consumer financial law;
(B) obtaining information about the activities and compliance systems or procedures of such
person; and
(C) detecting and assessing risks to consumers and to markets for consumer financial
products and services.
(emphasis added)

Rather, we believe subpart (C) must be read within the context of (A), which uses the defined term “Federal consumer financial law,” thereby limiting the scope of statutes under which the CFPB has supervisory authority. As we previously wrote, the MLA is not a “Federal consumer financial law” under Dodd-Frank. To read (C) as a standalone authorization for the CFPB to conduct MLA examinations is to infer that the CFPB has statutory authority for proactive oversight relating to any number of federal statutes that could plausibly affect “consumers and markets for consumer financial products and services.” Likewise, if (C) is indeed as broad as the senators are implying, (A) would be superfluous, since (C) would offer a sufficient grant of authority to cover supervision under any “Federal consumer financial law,” as well as under any other law deemed relevant to “detecting and assessing” the risks outlined in (C).

The CFPB’s ongoing approach to the Servicemembers Civil Relief Act (SCRA) is instructive here. Like the MLA, the SCRA is not a Federal consumer financial law, even though it has direct bearing on various “consumer financial products and services,” including personal loans, motor vehicle loans and mortgage loans. However, the CFPB has not published any general SCRA examination procedures, and we are likewise not aware of general SCRA-related supervisory activity on the part of the CFPB.

On August 10, the New York Times reported that Mick Mulvaney, the CFPB Acting Director, intends to dispense with routine supervisory examinations of creditors for violations of the Military Lending Act (MLA).  According to the report, Acting Director Mulvaney has argued in a two-page draft change to the CFPB’s policies that “proactive oversight is not explicitly laid out in the legislation.”

We agree with Acting Director Mulvaney that the CFPB lacks statutory authority to examine creditors for MLA compliance.  Sections 1024(b)(1)(A) and 1025(b)(1)(A) of the Consumer Financial Protection Act (CFPA) provide that the CFPB shall conduct examinations of covered persons to assess compliance with the requirements of “Federal consumer financial laws.”  Section 1002(14) of the CFPA defines the term “Federal consumer financial law” to mean generally the provisions of the CFPA and the “enumerated consumer laws.”  Section 1002(12) lists the “enumerated consumer laws.”  There are 18 federal statutes listed in Section 1002(12).  Noticeably absent is the MLA.

Although supervisory examinations for MLA compliance are expected to come to a halt, the Times reports that the CFPB will continue to pursue cases against creditors for violations of the 36 percent interest rate cap.  (The 36% cap is on the Military Annual Percentage Rate (MAPR), which is an “all-in” APR that includes interest and other fees such as application fees and annual fees that are not finance charges under Regulation Z.)

While the CFPB does not have statutory authority to examine creditors for MLA compliance, it does have MLA enforcement authority.  The MLA authorizes the CFPB to enforce the MLA against the same persons as to whom it has Truth in Lending enforcement authority (i.e. any person subject to TILA.)

The CFPB will also continue to supervise creditors under other consumer protection statutes.  According to the Times report, “the rule change came from a top-to-bottom review of the bureau’s procedures geared at curtailing what the administration, along with lending industry executives, have criticized as overly aggressive enforcement by the bureau’s first director, Richard Cordray.”

In place of supervisory examinations, it appears the CFPB will rely exclusively on complaints reported by service members through the CFPB’s website and hotlines.  Christopher L. Peterson, a University of Utah law professor who participated in the drafting of the Department of Defense’s regulations implementing the MLA, observed that enforcement “will go from a proactive system to something that is completely reactive.”  At the same time, Acting Director Mulvaney is urging Congress to pass legislation amending the MLA to expressly permit supervisory examinations.  A spokesman for Mr. Mulvaney, John Czwartacki, stated “we are 100 precent committed to seeing that happens.”

 

On August 1, 2018, Sen. Bill Nelson (D-Florida) introduced S. 3334 captioned “The Military Lending Improvement Act of 2018” in the United States Senate to “expand and improve” credit protections afforded to service members by the Military Lending Act (MLA) and the Fair Debt Collection Practices Act (FDCPA).  If this bill becomes law, it would lower the maximum rate of interest on covered transactions from 36 percent to 24 percent.  It would also expand transactions covered by the MLA to include auto and other loans secured by personal property, extend MLA protections to recently-discharged veterans, and amend the FDCPA to prohibit debt collectors from “harassing” service members by calling their commanding officers.

In a press release, Sen. Nelson, who is a senior member of the Senate Armed Services Committee, stated that “our military men and women have dedicated their lives to serving our county and we must help ensure they do not become the targets of unscrupulous lenders.”  Specifically, the bill would:

  • Reduce the interest rate cap under the MLA from 36 percent to 24 percent.  (The 36% cap is on the Military Annual Percentage Rate (MAPR), which is an “all-in” APR that includes interest and other fees such as application fees and annual fees that are not finance charges under Regulation Z.)
  • Extend coverage of the MLA to veterans for up to one year following discharge from active duty.
  • Expand coverage of the MLA to credit intended to finance the purchase of motor vehicles and other personal property.
  • Amend the FDCPA to prohibit debt collectors from “communicat[ing], in connection with the collection of any debt, with the commanding officer or officer in charge of any covered member, including for the purpose of acquiring location information about the covered member.”
  • Prohibit debt collectors from threatening that failure to cooperate with a debt collector will result in prosecution under the Uniform Code of Military Justice.
  • Prohibit creditors from requiring installation of GPS trackers or kill switches in motor vehicles as a condition of extending credit to service members.
  • Require the Department of Defense to assess whether creditors downloading bulk data from the MLA database are using adequate safeguards to prevent data breaches and other potential misuse of downloaded data.

The Military Lending and Improvement Act of 2018 was originally introduced as amendments to the National Defense Reauthorization Act of 2019 (which has already been presented to the President for signature), though no action was taken on the proposed amendments.  Accordingly, Sen. Nelson reintroduced the amendments as a standalone bill, S. 3334, which has been referred to the Committee on Banking, Housing and Urban Affairs.  The bill will surely be opposed by the consumer financial services industry, which has seen MLA coverage explode from furthering the statute’s original purpose — protecting service members from aggressive pay day-type loans – to placing restrictions on forms of credit not typically considered “predatory,” such as credit cards.  We will provide updates on the bill as they become available.

On March 28, the Department of Justice (DOJ) brought another lawsuit against an auto finance company alleging the company violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without obtaining necessary court orders.

The case, brought against California Auto Finance, was preceded by an investigation that DOJ launched after receiving a single complaint from a servicemember. According to DOJ, the servicemember whose car was repossessed complained that the company had no process to determine customers’ military status.

Notably, the lawsuit filed in federal court does not allege other specific instances of improper repossession beyond the one alleged by the individual servicemember who complained. Rather, DOJ argues that because the company “had, and still has, no policies or practices in place to verify the military status of borrowers before repossessing their vehicles,” the company “may have repossessed motor vehicles, without court orders, from other servicemembers who had made a deposit or installment payment to [California Auto Finance] prior to entering military service and were in military service at the time of the repossession.” Per the complaint, this amounts to “a pattern or practice of violating Section3952(a)(1) of the SCRA, 50 U.S.C. § 3952(a)(1).”

Allegations that a defendant failed to perform an SCRA scrub have become a recurring feature of DOJ complaints in this area, although it’s worth noting that the statute itself does not require checking the Department of Defense’s Defense Manpower Data Center database to verify military status, as opposed to using other methods to determine whether a borrower might be a servicemember. Rather, this apparent requirement has evolved over the course of various consent orders.

DOJ is seeking monetary damages, civil monetary penalties, and injunctive relief to “prevent future repossession that violate the SCRA.”

This suit follows several others filed by DOJ in the past year claiming SCRA violations related to vehicle repossession and disposition. In February, for example, DOJ settled with the City and County of Honolulu, Hawaii and its general contractor for towing services after alleging  these entities violated the SCRA by auctioning or otherwise disposing of motor vehicles owned by servicemembers that were deemed abandoned without first obtaining court orders. Likewise, in October of last year, DOJ entered into a settlement with Westlake Services LLC over allegations that the company and a subsidiary had repossessed vehicles owned by SCRA-protected servicemembers without obtaining the required court orders. So, while military finance in general continues to be an active area of federal enforcement, repossession and disposition is emerging as a sphere of heightened regulatory risk. Here, DOJ bringing suit in response to a single servicemember complaint and a single alleged instance of wrongful repossession speaks for itself.

 

We previously reported that several trade groups had sent letters petitioning the Department of Defense (DoD) to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act (MLA) final rule and its December 2017 amendments. Q&A 2 generated much uncertainty regarding application of the MLA’s exemption for purchase money transactions that also finance the purchase of GAP insurance.

In addition to the letters mentioned in our earlier post, the American Bankers Association (ABA) submitted a similar petition to DOD, and the National Automotive Dealers Association (NADA) and the American Financial Services Association (AFSA) likewise sent a joint letter to DoD requesting withdrawal of Q&A 2.

Both letters highlight a key concern that has arisen in light of  Q&A 2: that MLAcovered borrowers and their families are likely to have diminished access to GAP insurance as a result of Dodd’s guidance. The NADA/AFSA petition describes Q&A 2 as “drying up the availability of these products to covered members (and in some cases all consumers) overnight,” with association members “seeking to structure their transactions so as not to trigger application of the statute in the first instance by staying within DOD’s newly constricted motor vehicle financing exclusion.” The ABA letter also states that, “the new interpretation in the amendments has created uncertainty and confusion in the market and potential substantial liability for automobile dealers and lenders who in good faith relied on the plain language of the statute and regulation,” noting that because the December 2017 amendments appear to be retroactive, “vehicle financing loans made after the MLA Regulation effective date of October 3, 2016 may be void and subject to significant penalties and attorneys’ fees.”

It seems these petitions may be achieving their desired effect. We are hearing murmurings that DoD intends to rescind its prior guidance. At least one other blog has made a similar observation,  and our understanding is that the interpretation could be withdrawn as soon as May of this year. If these predictions prove true, it would be a welcome development.

 

Yesterday, the Department of Defense’s (DoD) Military Lending Act website was temporarily taken offline to accommodate various “security and performance enhancements.”

Notably, the DoD has added the ability to search using an Individual Taxpayer Identification Number (ITIN). An ITIN is a tax processing number that the IRS makes available to certain nonresident and resident aliens, their spouses, and dependents who are unable to get a Social Security Number (SSN). This change was needed in light of the fact that being a U.S. citizen is not a requirement to serve in the armed forces, and thus the prior search functionality (which only used SSNs) potentially excluded covered individuals.

The full notice posted on the website read as follows:

Changes to MLA

The MLA website will be unavailable from 4 p.m. Pacific Standard Time on Thursday, March 15, 2018 to 12 a.m. Pacific Standard Time on Friday, March 16, 2018. During that time, security and performance enhancements will be made to the MLA website to include updates to the reCAPTCHA functionality and increasing search capabilities by adding Individual Taxpayer Identification Number (ITIN) as a search parameter.

The U.S. Senate on March 14 passed S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), by a vote of 67 to 31.  Although the Act would not make the sweeping changes to the Dodd-Frank Act found in the Financial CHOICE Act of 2017 (CHOICE Act), it, nevertheless, would provide financial institutions welcome relief from a number of specific Dodd-Frank provisions.

Representative Jeb Hensarling, Chairman of the House Financial Services Committee, has indicated that further negotiations between the House and Senate must take place before the House votes on the Act.  House Speaker Paul Ryan has taken a more conciliatory tone, commenting on the need for common sense bipartisan solutions in the final bill.  As a result, while a final bill can be expected to include changes to the Act, it is unclear how substantial those changes will be.  Assuming a final bill signed by President Donald J. Trump retains many, if not most, of the Act’s provisions, the Act should positively impact both smaller and larger financial institutions.  The Act would make a number of changes to provisions of Dodd-Frank and other federal laws regarding consumer mortgages, credit reporting, and loans to veterans and students.

On June 19, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar: Economic Growth, Regulatory Relief, and Consumer Protection Act: Anatomy of the New Banking Statute.  The webinar registration form is available here.

The Act would also reduce the regulatory burdens on financial institutions—particularly financial institutions with total assets of less than $10 billion.  Bank holding companies with up to $3 billion in total assets would be permitted to comply with less restrictive debt-to-equity limitations instead of consolidated capital requirements.  This change should promote growth by smaller bank holding companies, organically or by acquisition.  Larger institutions should benefit from the higher asset thresholds that would apply to systemically important banks subject to enhanced prudential standards.  The higher thresholds may lead to increased merger activity between and among regional and super regional banks.

Although the banking industry can be expected to view the Act positively should it become law, it falls short of the CHOICE Act in several important respects. The CHOICE Act would:

  • reduce regulatory burdens on institutions based on capital levels irrespective of asset size
  • reduce the Financial Stability Oversight Council’s powers
  • repeal Dodd–Frank’s orderly liquidation authority, and
  • scale back the CFPB’s powers.

For a summary of some of the Act’s key provisions applicable to financial institutions, click here for our full alert.

The Washington state Senate and House of Representatives have passed a bill (House Bill 1056) that would expand the coverage of the Washington Service Members’ Civil Relief Act (WSCRA) and provide additional protections to active duty service members.  The bill is now awaiting signature by the state’s Governor, who is expected to sign it.  The bill is effective 90 days after the current legislative session is adjourned, which is expected to occur by March 8.

The WSCRA is the state’s version of the federal Servicemembers Civil Relief Act (SCRA).  Like the SCRA, the WSCRA provides various protections for active duty military service members, including reduced interest rates on preexisting debts, foreclosure and eviction protections, and protections from default judgments.  On March 28, 2018, from 12 p.m. to 1 p.m ET, Ballard Spahr attorneys will hold a webinar, “Update on Federal and State Military Finance Developments.”  Click here to register.

In 2014, the WSCRA was amended to create a private right of action and to authorize the Washington state Attorney General to enforce the WSCRA.  House Bill 1056 would further amend the WSCRA by expanding its definition of “service member” to mean “an active member of the United States armed forces, a member of a military reserve component, or a member of the national guard who is either stationed in or a resident of Washington state.”  The current definition only covers Washington state residents who are members of the national guard or a military reserve component.

The bill would also add a new section to the WSCRA that allows a service member to terminate or suspend certain service contracts at any time after he or she receives orders for a permanent change of station or a military deployment for 30 days or more.

The service contracts covered by the new section are: contracts for telecommunications services from a telecommunications company; health studio services from a health studio; subscription television services from a television service provider; and internet services from an internet service provider.  To terminate or suspend a contract, a service member must provide written proof of his or her official orders.

A termination or suspension is effective upon the service provider’s receipt of the service member’s written notice of termination or suspension (which can include email notice).  The service member remains obligated to pay for services rendered before the effective date of the suspension or termination, cannot be charged a penalty, lose a deposit, or incur any additional cost due to the suspension or termination, and can reinstate the services by giving written notice to the provider within 90 days after the service member’s military service terminates.

The bill specifies that the renewed services must be on the same terms and conditions that originally applied if the service member served for no more than 12 months.  For longer service, the terms and conditions for the renewed services must be the same as those offered to any new consumer at the lowest discounted or promotional rate within the previous 12 months.