By Michael Gordon, defi SOLUTIONS VP, Compliance
We won’t speculate on where federal compliance enforcement is headed; it’s too early for that. The uncertainty at the federal level; however, makes our previous blog post on state consumer privacy laws all the more relevant. In that post we discussed the CFPB’s call to action to state governments to address perceived gaps in the protection of consumer information. We cautioned that when states do take such action, the results can pose compliance challenges for lenders who must become familiar with often inconsistent state laws. If federal enforcement is reduced, the opportunity for states to take more aggressive enforcement positions will expand. In this post we provide an example of that phenomenon, which may have practical effects on auto lenders.
The Servicemembers Civil Relief Act (SCRA) is a well-known federal law that provides various benefits and protections to members of the armed services and certain other groups when called to active duty. In our industry, the most familiar protection may be the reduction of the interest rate of loans originated prior to active duty to 6% once active duty commences. Knowing that active-duty orders could come unexpectedly, Congress wanted to ensure that a loan taken prior to such orders would not prove an undue burden on members of the military and their families — a commendable policy goal.
As a federal law, the SCRA understandably has one notable gap — its protections do not apply to National Guard members called to active duty by state governors. About half the states have addressed this (and other perceived issues) by passing their own, state-level SCRA equivalents. Remember, the states can’t enact fewer protections than the federal government, whose SCRA functions as a floor. But they can enact increased protections, and that is where compliance problems often begin.
At least three states — Louisiana, Ohio and Pennsylvania — go beyond either of these efforts by expanding the scope of the interest rate protection. Not by lowering the maximum interest rate below 6%, but by decreeing that the protection applies even to loans originated after orders to active duty are issued.
In other words, these states came to a different conclusion about how best to protect servicemembers, and as sovereigns in the federal system they enacted these conclusions into law. It’s impossible to impugn anyone’s intentions. But this is a concrete example of how differing assessments of how best to legislate, and the freedom states have to go beyond federal requirements, can result in traps for the unwary lender, even those who keep compliance front of mind.
There’s room to take a number of lessons from these state SCRA protections. One is that even when everyone agrees on the goal — protecting servicemembers — differences in how to achieve that goal can result in compliance challenges for lenders, particularly those active in multiple jurisdictions. Another is to do your research — if a servicemember claims state SCRA protections, it’s quite possible they know exactly what they are talking about, even if it’s new to you. And do your homework — with moderate effort there are a variety of news sources available that can provide updates on changes to laws. Finally, if the CFPB’s role in enforcement is severely reduced over the next four or more years, expect states to grow more aggressive in policing their own laws, and possibly federal requirements as well.
