In a major effort toward protecting military members from predatory lenders, the Consumer Financial Protection Bureau announced Wednesday it will restart its examinations of lenders to enforce the Military Lending Act.
The announcement reverses a 2018 decision made by CFPB leadership during the Trump administration to stop these examinations of lenders’ records to monitor for possible violations of the Military Lending Act, citing CFPB leadership’s belief they didn’t have the authority to do so under law.
Among other things, the Military Lending Act limits the annual percentage rate on many loans to active-duty military and their dependents to 36 percent, including application fees and certain other fees in the calculation. Generally, most loans’ APR would be less than 36 percent, but loans with even higher interest rates — sometimes topping 300 percent — are still available in the civilian community from payday lenders, for example.
Lenders must check to make sure the borrower is not covered by the Military Lending Act before making the high-interest loan.
The law also prohibits lenders from forcing military borrowers to use a military allotment to repay a loan; and prohibits forced arbitration in lending disputes, which guarantees the right to military borrowers to take their cases to court.
While the Defense Department developed rules to implement the 2006 law, DoD doesn’t have authority to enforce it with lenders. That’s up to federal regulators of financial institutions, such as the CFPB and regulators of banks and credit unions. The CFPB is the only regulator that examines the practices of nonbank establishments such as payday lenders, vehicle title lenders, installment lenders and certain others.
In 2018, the CFPB stopped its examination of Military Lending Act-related activities based on officials’ interpretation that Congress didn’t specifically give the CFPB authority to do those examinations. That changed with an interpretive rule issued Wednesday. “The current CFPB leadership does not find those prior beliefs persuasive and the CFPB will now resume MLA-related examination activities,” stated an announcement from CFPB Wednesday.
“This decision affirms the CFPB’s ongoing commitment to the financial protection of our service members and their families,” said Jim Rice, assistant director for the CFPB’s Office of Servicemember Affairs, in the announcement.
Consumer advocates applauded the CFPB’s decision. “This is fabulous news,” said Paul Kantwill, a retired Army colonel who is founding executive director at The Rule of Law Institute at Loyola University Chicago School of Law, and former assistant director for service member affairs at the CFPB.
“The resumption of supervisory activity under the Military Lending Act sends a strong deterrent message to those who have, or might try to, take advantage of our service members and their families. We cannot know exactly what harm has come to military consumers during the hiatus, but we know now that the sentries are back at their posts, looking out for our troops,” said Kantwill, who was also previously director of legal policy for the DoD undersecretary of personnel and readiness.
“The Military Lending Act is an essential law protecting the finances of our military families and we are excited to announce this rule change prior to July, which is Military Consumer Month,” said CFPB Acting Director Dave Uejio, in the announcement. “Through our enforcement of the MLA, companies that harmed military borrowers have been ordered to pay millions of dollars in redress and civil penalties.
“To fulfill its purpose and protect military borrowers we must supervise financial institutions and hold them accountable for endangering consumers.”
As CFPB was considering changing its policy in 2018, leaders from 38 organizations representing millions of current and former service members and their families sent letters to then-Secretary of Defense Jim Mattis and acting director of the Consumer Financial Protection Bureau Mick Mulvaney, urging continued strong enforcement of the Military Lending Act.
“We urge you to stand with the troops and against any attempt to weaken the Military Lending Act, including the Bureau’s supervisory and enforcement authority and [DoD’s] rules against predatory lending by all businesses, including by car dealerships,” the advocates wrote. In addition, the advocates mounted a $250,000 advertising campaign urging continued strong enforcement of the law.
At the time, advocates said, there were indications that the Military Lending Act has had the desired effect of reducing the usage of predatory lenders, citing DoD survey results that indicate less use of payday loans by service members.
The CFPB amended its supervisory procedures in 2013 to allow examiners to review lenders’ records regarding MLA violations. From that time until 2018, no companies disputed CFPB’s authority to review their MLA lending practices, CFPB officials stated.
In an interview with Military Times in 2019 about the decision, then-CFPB Director Kathleen Kraninger said CFPB examiners still had the ability to highlight concerns or violations of the Military Lending Act, as they’re conducting examinations for compliance with other federal laws.
“If examiners see something related to the MLA, they absolutely cite it and make the company aware of it, and to the extent it needs to be taken to the next level, we have full enforcement authority when it comes the MLA,” Kraninger said.
“What we’re seeking is narrow, explicit authority to do exams particularly on the MLA, to actively go in and do a concerted MLA-related exam,” she said.