A recent federal court decision from the Northern District of Texas offers some useful lessons and insights for creditors relying on the Military Lending Act’s (MLA) safe harbors for verifying whether a consumer is a “covered borrower.”

In Greenwood v. Cottonwood Financial, Ltd., 2022 WL 3754706 (N.D. Tex. 2022) (see also court decision here), the plaintiff obtained a high-APR cash advance from a lender that used status reports from a nationwide consumer reporting agency (CRA) to verify applicants’ MLA status. The CRA would return one of two descriptive codes, indicating whether or not an applicant was a covered borrower. In this instance, the status report indicated that the plaintiff was NOT a covered borrower, even though she claimed to have been on active guard duty — and thus a “covered borrower” under the MLA — at the time the loan was made. The loan’s MAPR exceeded 36%, and the loan agreement contained a mandatory arbitration provision, all in violation of the MLA.

The plaintiff filed a class action, alleging violations of the MLA and state law claims under the Wisconsin Consumer Act. When the lender moved to compel arbitration, the key issue was whether the CRA’s status reports were sufficient to meet the MLA’s safe harbor provisions for verifying covered borrower status.

As background, the MLA rule promulgated by the Department of Defense (DoD) offers two safe harbors for verifying a consumer’s covered borrower status: (1) using information relating to that consumer, if any, obtained directly or indirectly from the Defense Manpower Data Center (DMDC) database maintained by the DoD by inputting the consumer’s last name, date of birth, and Social Security number or (2) using a statement, code, or similar indicator describing the consumer’s status if contained in a consumer report from a nationwide CRA. In either case, the lender must maintain the records establishing the safe harbor.

The lender posited that it had used the second method to establish that the plaintiff was not a covered borrower. The plaintiff argued that the lender could not rely on the consumer report safe harbor for several reasons, all of which the court rejected in granting the lender’s motion to compel arbitration.

MLA Database as a CRA Verification Information Source

First, the plaintiff argued that since the CRA derived its verification data from the DMDC database, the lender was “indirectly” obtaining information from the DMDC database rather than actually relying on a code in a consumer report. In rejecting this argument, the court cited 2015 DoD interpretive guidance, stating that a nationwide CRA that “provides to its client-creditors consumer reports containing covered-borrower data derived solely from the DMDC database may enable those creditors to use either of the two methods.” Put differently, that the CRA used the DMDC database as its data source did not undermine the applicable safe harbor.

Is a CRA-Provided Covered Borrower “Status Report” Also a “Consumer Report”?

Second, the plaintiff’s argued that the CRA-generated status report was not a “consumer report” for purposes of the safe harbor since it was not a pre-existing report containing information about the plaintiff, undercutting justifications for allowing a CRA-related safe harbor cited during the rulemaking process. Specifically, the plaintiff maintained the report did not meet implied accuracy standards because (1) the CRA did not self-validate the DMDC database information, and (2) the plaintiff had no opportunity to dispute any inaccuracies in the report because it had not been created until after the plaintiff had applied for loan. In response, the court pointed to the MLA’s incorporation of the Fair Credit Reporting Act’s definition of a “consumer report” and held there was “no genuine issue of material fact as to whether the MLA status report qualifies as a consumer report.”

Including Date of Birth in Verification

Third, the plaintiff asserted that even if the CRA-provided status report was a “consumer report” under the MLA, the safe harbor was still inapplicable because the lender had not provided the plaintiff’s date of birth to the CRA. Acknowledging that entering a prospective borrower’s date of birth is required for the MLA’s DMDC database verification safe harbor, the court emphasized that no such requirement exists when relying on a covered borrower status indicator in a consumer report. Importantly however, the court observed that if the decision had hinged on the DMDC database safe harbor, a failure to include this field could have led to a different outcome. This illustrates that even seemingly small technical missteps or omissions could be highly consequential when relying on the MLA’s safe harbors. For that reason — if technically feasible — some added protection can be gained by using all of the required inputs for the MLA database safe harbor when requesting a report from a CRA to verify covered borrower status.

MLA Recordkeeping Requirements

Finally, the plaintiff argued that the lender failed to comply with MLA’s recordkeeping requirements — a prerequisite to relying on either safe harbor to verify a consumer’s status. On this point, the court agreed with the lender that source code showing the lender’s status inquiry and the CRA’s responsive report was sufficient such that no genuine dispute existed as to the lender’s compliance with MLA recordkeeping requirements. While the lender was able to rely on source code to demonstrate it had properly maintained records, the court’s opinion suggests a clearer “paper trail” documenting the lender’s MLA verification efforts could have simplified the defendant’s response to these recordkeeping claims.

We’re Here to Help

The CFPB and private litigants continue to take aggressive action to enforce the MLA and its implementing regulations. It is advisable for lenders to ensure their compliance programs are up to date to prevent compliance issues before they occur. We have the experience to assist. Troutman Pepper’s Military Lending Practice Group includes one of the oldest and most well-respected consumer financial services and regulatory practices in the nation. Let us help you ensure our military members are rewarded for their valuable service to our nation.