Frequently Asked Questions about the Defense Department’s Military Lending Act Regulations

The following is intended to help pawnbrokers prepare for the October 3, 2016 mandatory compliance date for the expanded Military Lending Act (MLA) regulations. This information is not intended as, and should not be used as, a substitute for guidance from your local lawyer.

What is the Military Lending Act? The MLA was enacted by Congress in 2006, and the DOD adopted a regulation to implement it in 2007, but did not cover pawn transactions. The DOD expanded the scope of the regulation to cover additional consumer credit products on July 22, 2015 (“2015 regulation”), and specifically mentioned pawn transactions.

When does compliance with the DOD’s 2015 regulation become mandatory for pawn transactions? October 3, 2016, unless extended by the DOD or otherwise by Congress or a court of law.

What types of transactions does DOD’s expanded regulation govern? The 2015 regulation applies to pawns if the borrowers or pledgers are active duty service members, their spouse or other dependent who receives 51% or more of their support from the service member. These consumers are “covered borrowers”. No traditional non-recourse pawn transaction entered into before October 3, 2016 is affected by the 2015 regulation. The 2015 regulation does not affect pawns entered into before your customer became an active duty service member or dependent of one.

What are the key requirements of DOD’s regulation? The 2015 regulation: • caps the maximum Annual Percentage Rate (APR) that may be imposed on covered borrowers’ transactions at 36 % APR; which is the Military Annual Percentage Rate (MAPR); • requires the creditor/pawnbroker to verbally disclose the MAPR before the transaction and also in writing separately from disclosures required by TILA; and, •prohibits the use of contract clauses that require the covered borrower either to waive their right to legal recourse under any applicable provision of State or Federal law, including the Servicemembers Civil Relief Act, or to submit to arbitration or imposes burdensome legal notice provisions in the case of a dispute.

08.2016 P.O. Box 508 Keller, TX 76244 1 NationalPawnbrokers.org All Rights Reserved. Reproduction of this document in any form requires express advance permission from the National Pawnbrokers Association. Copyright© National Pawnbrokers Association 2016. How can pawnbrokers determine which customers are eligible for special terms under the expanded regulation? The regulation sets out three ways for creditors to determine which consumers are “covered borrowers” and entitled to the special terms: •Pawnbrokers may use any reasonable means of determining which consumers are covered. The DOD regulation provides no guidelines for what these means may be. However, the DOD withdrew the previous option of using the “covered borrower statement” as a means to obtain “safe harbor” protection. If you elect to use that “covered borrower statement” be aware that this method is not eligible for the “safe harbor” provided in the 2015 regulation. •Pawnbrokers may use one of two “optional” means that qualify as “conclusive proof” that the consumer is or is not a “covered borrower.” Currently, both of these means require the pawnbroker to obtain the consumer’s Social Security Number. ·The DOD offers ”verified responses” for searches of its Defense Manpower Data Center (DMDC) website database of active-duty service members and dependents. This database can be found at https://mla.dmdc.osd.mil . ·Alternatively, pawnbrokers can contract with one of three national credit reporting agencies – Equifax, TransUnion, or Experian – for verification of the consumer’s status. (Note: These consumer reporting agencies may or may not be ready to provide this service by the October 3, 2016 mandatory compliance date, and may not have a verification product available for pawnbrokers. The NPA is following product-development by these companies and will alert members if and when their services become available to pawnbrokers. However, consumer-report charges cannot be passed on to the consumer if the MAPR for the transaction would be more than 36 %.) Using one of these “conclusive proof” methods entitles the creditor to a “safe harbor” from federal and state enforcement proceedings, criminal prosecution, and consumers’ private lawsuits – as long as the transaction also complies with the DOD regulation’s requirements.

How long do I need to keep proof that the pledgor was not a covered borrower? For five years after the date of all pawns originated after October 3, 2016.

What should pawnbrokers do about consumers who either do not have Social Security Numbers or will not provide them? The DMDC will not provide a “verified response” unless the consumer’s Social Security Number is entered as part of the request. That means if you choose to loan to a customer without a Social Security Number you will not be able to access the “safe harbor.”

08.2016 P.O. Box 508 Keller, TX 76244 2 NationalPawnbrokers.org All Rights Reserved. Reproduction of this document in any form requires express advance permission from the National Pawnbrokers Association. Copyright© National Pawnbrokers Association 2016. Unless state law prohibits you from refusing to serve someone who does not have a Social Security Number, you will have to make a business decision about whether to extend credit to these consumers. See the discussion of criminal and civil liability for violations of the MLA that follows to help inform your business decision.

Is the service member or dependent required to present some form of military ID to qualify for the special terms provided in the MLA, including the 36% MAPR cap? No. It is the creditor’s responsibility to determine covered -- borrower status – or risk making a pawn that violates the MLA and 2015 regulation.

Can pawnbrokers check the borrower’s status after completing the pawn transaction? No. The 2015 regulations specifically prohibit what are called “back-end” checks of covered borrower status.

How does the MAPR cap affect early redemptions of pawn transactions? The 2015 regulation does not provide any guidance on how to handle the MAPR cap if a covered borrower redeems a pawn prior to the maturity date set by state laws other than a blanket instruction in the MLA and 2015 regulation limiting the MAPR to 36%. Until the DOD or the CFPB provides guidance on how to handle early redemptions, we urge pawnbrokers to follow the provisions of their own state laws. If your state law directs you to prorate finance charges for any or all parts of the period the pawn is outstanding, you should prorate for covered borrowers on the same basis. But you may not charge more than the maximum 36% MAPR.

How is the MAPR calculated? The MAPR is calculated the same as the regular APR for pawn transactions. (The differences in calculation relate to types of charges pawnbrokers do not make, such as for credit-life insurance premiums.) Pawn software companies have been re- programming their products to enable the MAPR calculation. The NPA, however, has not tested any of the pawn software programs for compliance with the 36% MAPR cap and does not intend to do so. The 2015 regulation requires that only those charges and fees allowed by federal or state laws may be imposed on covered borrowers. Be certain that you do not apply any charge or fee that is not allowed by federal or state law. Talk to your local lawyer about which fees are allowed by law and which are excluded by TILA.

Do pawnbrokers need to revise their pawn tickets to comply with the MLA? Not necessarily. You can make the required written MAPR disclosure on a separate document from your pawn ticket. (The NPA’s suggested text for the written MAPR disclosure follows these FAQs. Many pawnbrokers will want customers to sign and date receipts for this MAPR disclosure.) You will need, however, to revise your pawn ticket if your current pawn ticket includes any term prohibited by the MLA.

What are the penalties for failing to comply with DOD’s expanded regulation and who can enforce it? If you do pawn transactions with covered borrowers without following the 2015 regulation, including limitations on terms other than the MAPR cap, you will face possible state or federal regulatory enforcement investigations or misdemeanor prosecutions (for knowing violations).

08.2016 P.O. Box 508 Keller, TX 76244 3 NationalPawnbrokers.org All Rights Reserved. Reproduction of this document in any form requires express advance permission from the National Pawnbrokers Association. Copyright© National Pawnbrokers Association 2016. If you do a pawn transaction with a consumer who provides a current military identification card as his or her valid ID and the terms do not comply with the 2015 regulation, the DOD and CFPB would likely consider this a knowing violation. The CFPB is the federal agency charged with enforcing the MLA and the 2015 DOD regulation. CFPB investigations are lengthy, time-consuming, very costly, and unpleasant.

What additional remedies may consumer pledgers seek against pawnbrokers? Congress provided a private right of action to covered borrower consumers for use against creditors that do not comply with the MLA and DOD regulation. “Credit agreements, promissory notes, or other contracts” with covered borrowers that violate the MLA are void. Plainly spoken…this includes pawn transactions in the view of the DOD and CFPB. Also, consumers may seek relief in civil actions including: (1) actual damages sustained as a result of the violation, but not less than $500 for each violation, (2) appropriate punitive damages, (3) appropriate equitable or other declaratory relief, and (4) any other relief provided by federal or state law. Consumers who prevail in the action may recover the costs of the action, together with reasonable attorneys’ fees as determined by the court.

Are the Military Lending Act and Servicemembers Civil Relief Act the same? No. The MLA regulation is completely different and separate from the Servicemembers Civil Relief Act (SCRA).

The NPA understands the burdensome requirements the 2015 MLA expanded regulation places on pawnbrokers. There is considerable time, expense and inconvenience involved in obtaining consumers’ Social Security Numbers in order to do a ‘covered borrower’ check. The lawsuit the NPA joined on July 22, 2016 raises cost and data-security concerns, among others, and asks for relief in the form of a method to obtain the “safe harbor” without having to obtain your customers’ Social Security Numbers. We will keep you informed about the litigation’s progress.

If you have questions about the Department of Defense MLA regulation or your compliance obligations, please send them to [email protected]

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Appendix 1 NPA’s Suggested MAPR Disclosure Statement

Military Annual Percentage Rate Disclosure Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces

08.2016 P.O. Box 508 Keller, TX 76244 4 NationalPawnbrokers.org All Rights Reserved. Reproduction of this document in any form requires express advance permission from the National Pawnbrokers Association. Copyright© National Pawnbrokers Association 2016. and his or her dependents may not exceed an annual percentage rate of 36 percent.

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08.2016 P.O. Box 508 Keller, TX 76244 5 NationalPawnbrokers.org All Rights Reserved. Reproduction of this document in any form requires express advance permission from the National Pawnbrokers Association. Copyright© National Pawnbrokers Association 2016.