Compliance with the Military Lending Act (MLA) may not be on the radar of many pawnbrokers, but it should be and here’s why. If you’re a pawnbroker, and you’re providing loans without first determining if the consumer is an active-duty military service member—or the dependent of one—your business could be at risk of non-compliance with the MLA. Keep reading to learn about the big impact this important law may have on your pawnbroker business.
What is the MLA and why is it suddenly so important to me?
In 2006, Congress passed the Military Lending Act (MLA) to help protect active-duty service members and their dependents from predatory lending. In 2015, the Department of Defense (DOD) issued a Final Rule amending the implementation rules of the MLA to cover a wider range of products impacting traditional creditors like banks and credit unions, as well as nonbank financial institutions such as pawnbrokers. While the Final Rule generally covers consumer credit transactions, nonrecourse pawn loans are not exempt as pawnshops were categorized under the definition of “consumer credit” and thus required to comply with the MLA as of October 3, 2016.
Specifically, the MLA limits all interest and other charges for credit to 36 percent Military Annual Percentage Rate (MAPR) for active duty service members and their spouses, children, and certain other dependents (“covered borrowers”). Other requirements, including adjusted contract and product terms, and providing a mandatory loan disclosure for covered borrowers, are also applicable to pawnbrokers.
As a pawnbroker, how can I comply with the MLA?
You must now, prior to every customer loan origination or closing, confirm whether the customer is an active-duty military service member or a dependent of one. You can do this by obtaining their MLA-covered status either directly or indirectly from the Department of Defense Manpower Data Center (DMDC), or from a nationwide credit reporting agency. In addition, you must obtain an updated MLA-covered status for new loans and loan renewals extended to existing customers, since a consumer’s previous MLA status may not be used in determining their status for another loan made subsequently.
Using any other method such as getting a written statement from each borrower does not meet the regulation’s requirements, and risks liability and penalties.
You may be thinking, “None of this applies to me, since my business isn’t located near a military base.” Think again. People travel, families are spread out and sometimes they don’t live together. The Final Rule mandates that a consumer’s MLA covered borrower status must be obtained for every consumer pawn loan, regardless of whether you believe them to be military or not, especially since it also applies to the dependents of active military members.
Non-compliance is bad for business
The MLA Final Rule grants “safe harbor” from liability (i.e. ‘a compliance protection’) to lenders that obtain the proper consumer MLA-covered status from all customers, for all pawn loans and keep a copy for five years. The Consumer Financial Protection Bureau (CFPB) is responsible for enforcement of the rule, and pawnbrokers who are not compliant could face civil and criminal implications. This includes a misdemeanor under the criminal code of the United States; any actual damages from the violations; appropriate punitive damages; appropriate equitable or declaratory relief; costs of the action and reasonable attorney fees; and any other relief provided by law. Depending on a pawnbroker’s loan volume, the potential legal costs can add up fast, since the business could be liable for damages of not less than $500 per violation.
Finding a solution that’s right for your business
While some pawnbrokers obtain MLA-covered status directly from the DMDC, the DMDC search requires the consumer’s Social Security number. This means you then have to establish expanded data security protocols to handle that sensitive consumer information.
Other approved options are available through certain credit reporting agencies. For instance, Equifax offers a simple solution created specifically for pawnbrokers that does not require the consumer’s SSN. It’s easy to use, with convenient online access, and requires minimal consumer information such as name, address and date of birth. All results are returned instantly to support faster transactions.
Depending on your unique business needs and customer demands, you may want help to better understand the new MLA requirements, and determining which compliance solution is right for you. Try reading this article published by the National Pawnbrokers Association for more information and helpful industry insight. Also, feel free to contact a knowledgeable Equifax associate to personally discuss how the recently expanded MLA will impact your business, or to learn more about our MLA Covered Borrower Status solution for pawnbrokers. Call 1-866-977-7015 or visit us online.
The information contained in this article does not constitute legal advice from Equifax. Pawnbrokers should consult their legal counsel for interpretation of the rules, determination of impact to their business, and suitability of individual compliance solutions.