Auto lenders may need to review their compliance to the Military Lending Act (MLA) to avoid reputational risks, fines or further punishment after the Consumer Financial Protection Bureau (CFPB) announced it would once again examine lenders’ records for violations of the MLA.
Lenders should start with an internal audit to assess their level of compliance with the MLA, Robert Savoie, a member at McGlinchey who specializes in the MLA, told Auto Finance News.
“The MLA has draconian penalty provisions, and it creates unique reputational risk for financial institutions because [the statute] protects service members and their families, and that is not a group of people lenders want to be seen violating the rights of,” Savoie said.
A loan in violation of the MLA must be voided from the transaction’s inception, providing no recourse to collect on the loan or reclaim the asset. Furthermore, lenders seen violating the MLA take a hit to their organization’s reputation, Savoie said.
There is also some concern that the CFPB will change the auto retail installment contract exemption of the MLA as it relates to ancillary products or voluntary protection products, Savoie said.
Currently, automotive retail installment transactions are not subject to MLA guidelines, but litigation sparked by consumer complaints has brought the question of auto’s exclusion back into the limelight. United Auto Credit, for example, was recently involved in a case in Virginia in which a complainant challenged the court to reinterpret auto’s exemption from the statute based on the fact that the loan included ancillary and voluntary protection products. It is unlikely, however, that the court will rewrite the law to expand beyond what Congress intended, Savoie said.
“You don’t change the entire scope of the American [legal system] solely because you … want the law to apply to something that it doesn’t,” Savoie said. “That’s inappropriate, and it shouldn’t be the interpretation.”
The CFPB, too, is unlikely to push its authority outside its perceived boundaries and risk losing authority over the MLA entirely. If the CFPB does push authority outside perceived boundaries, Savoie expects to see immediate lawsuits by lenders against the Bureau for overstepping its review of the MLA.
Congress enacted the MLA in 2006 to protect military members from predatory lenders who seek to take advantage of military families by:
- Limiting the annual percentage rate on many loans to military borrowers to a maximum of 36%;
- Prohibiting lenders from requiring military borrowers to arbitrate disputes;
- Prohibiting lenders from requiring military borrowers to waive their rights under any state or federal law;
- Prohibiting lenders from requiring military borrowers to use a military allotment to repay a loan. An allotment is an automatic payment system managed by the Department of Defense that provides servicemembers with the ability to transmit funds directly from their military pay before their net pay goes to their designated bank account; and
- Prohibiting lenders from charging military borrowers a penalty if they pay back part or all of a loan earlier than the agreed-upon schedule.
The CFPB began MLA-related examination in 2013, but under former director Kathleen Kraninger discontinued its review of the act in 2018, based on the belief that Congress had not specifically conferred MLA examination authority to the Bureau. However, under the leadership of acting Director Dave Uejio, the CFPB has resumed its MLA-related examination practices.
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