In this week’s episode, we discuss recent state legislative and enforcement developments involving state analogues to the federal Servicemembers Civil Relief Act.  We review state efforts to increase the duration of federal protections, expand the groups entitled to them, and extend similar protections to additional products and services.

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In this week’s episode, we discuss recent enforcement activity under the Military Lending Act and the Servicemembers Civil Relief Act, as well as takeaways about compliance.  We also review the CFPB’s controversial decision to no longer conduct exams for MLA compliance, look at the legal basis for the decision, and analyze the arguments made by critics.

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The Department of Justice recently entered into a settlement with Hudson Valley Federal Credit Union to resolve allegations that it violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without first obtaining the required court orders.  The settlement agreement  requires Hudson Valley to pay $65,000 to compensate seven servicemembers whose vehicles were alleged to have been unlawfully repossessed and to pay a $30,000 civil penalty to the United States.  The DOJ’s press release describes Hudson Valley as one of the largest credit unions in the country and the DOJ alleged in the complaint that as of year-end 2016, Hudson Valley had total assets of $4.445 billion, total deposits of $3.99 billion, and more than 275,000 individual and business members.

The SCRA, in 50 U.S.C. § 3952(a)(1), generally requires a court order to be obtained before the vehicle of an active duty servicemember can be repossessed based on a default under a retail installment sales contract for the vehicle’s purchase as to which the servicemember made at least one deposit or installment payment before being called to active duty.

The DOJ’s complaint alleged that it launched an investigation into Hudson Valley’s repossession practices after learning of two private lawsuits filed in the Southern District of New York by servicemembers who claimed that Hudson Valley repossessed their vehicles in violation of the SCRA.  The investigation revealed seven additional SCRA violations by Hudson Valley resulting from repossessions and that, prior to August 2014, Hudson Valley did not have any written policies or procedures that addressed the SCRA’s requirements for vehicle repossessions.

The settlement agreement describes updates made by Hudson Valley in February 2018 to its collection guidelines to address such requirements and prohibits Hudson Valley from making any material changes to those guidelines without providing a copy of the proposed changes to the DOJ and giving the DOJ an opportunity to object.  It also requires Hudson Valley to provide SCRA compliance training to all of its collections and lending employees.

Based on the DOJ’s determination that seven of Hudson Valley’s vehicle repossessions between 2008 and 2014 did not comply with the SCRA, the settlement agreement requires Hudson Valley to pay $10,000 in compensation to each of six servicemembers, plus any lost equity in their vehicles with interest.  Hudson Valley must also pay $5,000 to a seventh servicemember  whose vehicle was repossessed but returned within 24 hours.  It also agrees not to pursue or assign any deficiencies associated with the repossessions and must refund any amounts paid by the servicemember or a co-borrower toward any deficiency that was remaining after a repossession.

The settlement with Hudson Valley follows several other lawsuits filed by the DOJ earlier this year and in 2017 alleging SCRA violations related to vehicle repossession and disposition.

 

 

The New York Attorney General has filed a lawsuit against a group of commonly owned and managed companies headquartered in New York that include companies operating retail jewelry stores in numerous states under the name Harris Jewelry and another company providing financing for sales made at such stores under the name Consumer Adjustment Corp.  One of such stores is located in New York near a military base, as are the defendants’ stores located in other states.  The stores sell lines of military-themed jewelry and other commemorative items.  The defendants also include individuals alleged to have substantial involvement in the companies’ operations.

The complaint alleges that:

  • Harris Jewelry marks up its merchandise between 600 and 1,000% over the wholesale price (comparing that to the standard industry jewelry markup of 200 to 300%) and the “excess purchase price,” together with warranties and protection plans offered by Consumer Adjustment as well as other fees and charges, constitutes disguised interest which is added to the financing agreement’s stated 14.99% interest rate.
  • Consumer Adjustment finances more than 90% of Harris Jewelry’s sales and the relationship between the companies is never disclosed to consumers.
  • Harris Jewelry “professes to accept credit card or cash sales, sales are almost never made in this way.”  Instead, nearly all sales are financed by Consumer Adjustment.
  • Servicemembers are enticed to enter the defendants’ stores through the use of a purported charitable program in which Harris Jewelry sells teddy bears in military uniforms with promises of charitable donations and once in a store, tells servicemembers that Harris Jewelry can provide them with an opportunity to build or improve their credit scores through the “Harris Program,” the name given to the financing provided by Consumer Adjustment.  Only after a servicemember agrees to participate in the ”Harris Program” does Harris Jewelry begin to discuss its merchandise with the servicemember in an effort to maximize the amount of credit extended to him or her.

The complaint includes additional allegations regarding the defendants’ practice of advertising an item’s retail price with its “per payday” payment amount.  The AG alleges that the two amounts “bear little resemblance to the total amount paid by a consumer at the end of the financing contract” and thereby prevents a servicemember from calculating the total cost of a purchase.

Based on these allegations and other conduct by the defendants alleged in the complaint, the NY AG makes the following claims:

  • The “inflated retail prices and add-ons included in the ‘principal’ amount of the loan” result in an effective rate that violates New York’s civil and criminal usury laws
  • The interest charged by the defendants violates the 36% rate limit New York’s General Military Law
  •  Defendants’ business practices constitute fraudulent conduct under New York’s Executive Law (which defines “fraud” or “fraudulent”  to include any device, scheme, or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, or unconscionable contract provisions.)  Their business practices also constitute common law fraud because they involved intentional fraudulent conduct by the defendants.
  • Defendants’ business practices constitute deceptive acts or practices under New York’s General Business Law (GBL)
  • Defendants’ business practices caused the defendants to be a “credit services business” under the GBL and constitute deceptive acts under the GBL provisions that regulate such  businesses.
  • Defendants’ practices in connection with the purported charitable program violated provisions of New York’s Executive Law relating to for-profit companies that partner with a charity to sell products for the charity’s benefit.

 

 

 

 

Thirty state attorneys general, joined by the AGs of the District of Columbia, Puerto Rico, and the Virgin Islands, have sent a letter to CFPB Acting Director Mulvaney “to express our concern about recent reports that the [Bureau] will no longer ensure that lenders are complying with the Military Lending Act (MLA) as part of its regular, statutorily mandated supervisory examinations.” Such recent reports included one from the New York Times published in August 2018 indicating that Mr. Mulvaney was planning to eliminate routine supervisory examinations of creditors for MLA violations because the CFPB lacks statutory authority to conduct such examinations.

In addition to describing the benefits that the MLA provides to servicemembers, the AGs assert that the Bureau “would be failing to abide by its statutorily mandated duty to enforce the MLA by restrictively interpreting its examination authority to preclude lenders’ compliance with the MLA.” They cite to the MLA provision (10 U.S.C. Section 987(f)(6)) that states the MLA “shall be enforced by the agencies specified in section 108 of the Truth in Lending Act (15 U.S.C. 1607) in the manner set forth in that section or under any other applicable authorities available to such agencies by law.” Such agencies include the CFPB. The AGs argue that this language allows the CFPB to examine for MLA compliance because “Congress has explicitly provided [in the Consumer Financial Protection Act (CFPA)] that one ‘applicable authority’ available to the CFPB is examination of lenders in order to ‘detect[] and assess[] risks to consumers and to markets for consumer financial products and services.’”

The AGs appear to be arguing that the MLA allows the CFPB to use its supervisory authority to “enforce” the MLA. We believe this interpretation is incorrect for at least two reasons. First, TILA Section 108 specifies not only the agencies that can enforce TILA but also the laws they can use to exercise such enforcement authority. For the CFPB, Section 108 specifies that it can enforce TILA under subtitle E of the CFPA, the subtitle that sets forth the CFPB’s enforcement powers. Thus, it is apparent from a plain language reading that the phrase “any other applicable authorities” in the MLA refers to any laws that give the CFPB enforcement powers beyond those it can exercise under subtitle E. The CFPB’s supervisory authority (which is separately provided in subtitle B of the CFPA) is not a source of additional enforcement powers.

Second, the AGs’ argument ignores the CFPA provisions that set forth the scope of the Bureau’s supervisory authority. CFPA Sections 1024(b)(1)(A) and 1025(b)(1)(A) 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.

Another letter urging Mr. Mulvaney to reconsider his plans to eliminate MLA examinations was sent by all 49 Democratic Senators who also take the position that the CFPB has statutory authority to conduct such examinations. As discussed in our blog post, we think the Senators’ interpretation is based on a misreading of the Bureau’s supervisory authority under the CFPA.

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.