The Consumer Financial Protection Bureau's decision to stop examining financial firms for compliance with the Military Lending Act has sparked pushback not only from lawmakers and consumer advocates but also from the Defense Department and every major group representing military service members.
Acting CFPB Director Mick Mulvaney's claim that the Dodd-Frank Act does not give the bureau statutory authority to enforce the Military Lending Act is a major reversal from the Obama administration. As reported by several news outlets, Mulvaney has argued further legislation is needed to provide that authority.
But roughly 30 military and veterans groups are opposed to the supervisory rollback. The Department of Defense says it was not consulted on the bureau’s decision and remains committed to the current law, which imposes a 36% annual percentage interest rate cap for active-duty military members and their dependents.
"The Department believes that the full spectrum of tools, including supervisory examinations, contribute to effective industry education about, and compliance with, the MLA,” wrote Stephanie Barna, the acting assistant secretary of defense for manpower and reserve affairs, in a September letter to Sen. Bill Nelson, D-Fla.
Experts say the CFPB’s stance runs counter to the broad bipartisan support for the MLA both during and after its passage.
“To roll back a series of well-thought-out protections allows for the potential of great harm to military members that cannot be remedied by enforcement and regulations later on,” said Paul E. Kantwill, a senior fellow at Loyola University Chicago School of Law and a former CFPB assistant director of the Office of Servicemember Affairs.
Under the Obama administration, the CFPB cited authority in the Dodd-Frank Act to supervise financial firms for compliance with consumer protections as including the Military Lending Act restrictions. The MLA, enacted by Congress in 2006, initially applied to a narrow range of payday, auto title and tax refund anticipation loans. It was broadened in 2015 to include credit cards, installment loans and overdraft lines of credit, all subject to the 36% cap.
But as first reported in August by The New York Times, which obtained internal CFPB documents, the bureau intends to pause MLA-related exams because Mulvaney does not view such proactive supervisory authority as being explicit.
The paper reported that the agency still plans to respond to individual complaints about alleged MLA violations, and quoted a CFPB spokesman who said the bureau is “committed to seeing” congressional action to make the supervisory authority explicit.
But if the CFPB stops conducting oversight of the MLA through routine supervisory exams, service member and veterans groups fear predatory lenders would go back to aggressively marketing products to the military. The bureau would still have enforcement authority over lenders, but investigations of violations can take a year or longer and typically occur after the fact based on consumer complaints.
“It’s very concerning because without the MLA supervisory functions of the bureau, the service member is really left to their own devices in trying to address any abuses,” said Aniela Szymanski, director of government relations at the Military Officers Association of America.
Perhaps surprisingly, one group that didn’t have a negative response to the proposal was the Defense Credit Union Council, which represents credit union that serve the military and defense communities — including Navy Federal and PenFed credit unions, two of the nation’s largest.
“Credit unions, particularly defense credit unions are well-regulated by NCUA examiners and the Department of Defense,” said Anthony Hernandez, the council's president and CEO, referring to the National Credit Union Administration. Because many defense credit unions have a presence on military bases around the world, they are already well positioned to lend and provide other services “within the spirit of the MLA,” Hernandez added.
Kantwill, who led an interagency rulemaking to close loopholes for payday lenders in the MLA, said the bureau's decision "is a breach of faith to service members.” Regulators should be proactively concerned about protecting service members, he said, "because financial readiness is a principle of military readiness.”
A Defense Department report in 2015 found that thousands of military personnel every year end up losing their security clearances because of compromised finances. High-cost credit forces thousands of service members out of the armed services, hampers recruitment, and costs the Defense Department up to $132 million a year, the report said.
Kantwill met frequently with troops and top military leaders who have expressed concern about service members losing their security clearances.
"It's a big issue and an operational issue for the force," he said.
C.F. Drummond, the deputy assistant secretary of defense, responded in a September letter to concerns about the CFPB decision raised by the Military Officers Association of America and other military groups. Defense Secretary James Mattis “fully supports the MLA and remains committed to protecting the financial well-being of our service members and their families,” Drummond's letter said.
“Any changes proposed to the Department’s regulations implementing the MLA will be made only when necessary, and with the aim of not reducing any of the protections currently afforded,” Drummond wrote.
But Barna's letter to Nelson suggested that the Pentagon did not agree with the CFPB's decision.
“Although the CFPB' s acknowledgment of its intent to suspend MLA supervisory examinations has been documented in the media, the Department has not received any official notification from the CFPB in this regard,” Barna wrote. “Additionally, the Department did not discuss this specific change with the CFPB. The Department regularly consults with the prudential regulators regarding enforcement of the MLA, and the CFPB has proven to be a valuable advocate for Service members and their families through its education programs, technical assistance to the Department, and enforcement of consumer protection measures."
Barna wrote that service member use of high-cost financial products has declined because of increased education and MLA compliance monitoring and enforcement actions.
“Nevertheless, the Department remains concerned that predatory lending practices and high-cost credit continue to pose risks to the financial readiness of Service members and families,” she wrote. “Absent continued monitoring and enforcement of MLA compliance, the Department and the prudential regulators may be unable to identify or respond timely to trends or early warning signs of harmful practices.”
But some industry insiders argue that the MLA, particularly after efforts to strengthen the law, in some cases set financial institutions up for failure.
In general, banks and other financial institutions have gone to great lengths to ensure compliance with the MLA, in part since being perceived as harming service members could pose reputational problems.
But running afoul of the law is relatively easy. For example, large lenders are required to check a Defense Department database of active-duty service members to determine which borrowers fall under the APR cap, but some say the database is difficult to navigate. Also, if a lender includes an arbitration agreement in a contract for a service member, which is prohibited by the statute, then the contract is void and the lender may have to swallow the borrower's entire debt.
“Implementation of MLA has been a struggle for the industry and the penalties are really harsh,” said Ben Olson, a partner at Buckley Sandler and a former CFPB assistant director for the Office of Regulations.
The CFPB did not respond to a request for comment.
John Czwartacki, the CFPB spokesman, issued a statement in August saying the CFPB had engaged in “a comprehensive review of its activities and is assessing whether those activities align with its statutory authority.”
Mulvaney has claimed that the CFPB does not have specific authority to audit lending institutions for compliance with the MLA, which was not one of the 19 statutes specified in the Dodd-Frank Act.
Consumer advocates disagree on legal and policy grounds. For one thing, the CFPB’s examination manual still includes MLA compliance. It is unclear if the bureau would face legal challenges for trying to eliminate its supervisory role over the MLA.
Meanwhile, if legislation were proposed to give the CFPB more explicit supervisory authority over the MLA, some worry that lenders would lobby for exemptions from the law’s 36% interest rate cap.
“It is expressly in the Dodd-Frank Act that the CFPB has supervisory authority to monitor for consumer risk, and predatory lending falls directly in that bucket,” said Scott Astrada, the federal advocacy director at the Center for Responsible Lending. “Mulvaney’s whole argument that his hands are tied and the bureau doesn’t have the authority just doesn’t hold water, it falls apart.”
