Huntco Pawn Holdings, LLC v. U.S. Dep't of Def.

• Decision Date: 03 October 2016
• Docket Number: Civil Action No. 16–cv–1433 (CKK)
• Citation: 240 F.Supp.3d 206
• Parties: HUNTCO PAWN HOLDINGS, LLC, et al., Plaintiffs v. U.S. DEPARTMENT OF DEFENSE, et al., Defendants.
• Court: U.S. District Court — District of Columbia

240 F.Supp.3d 206

HUNTCO PAWN HOLDINGS, LLC, et al., Plaintiffs

v.U.S. DEPARTMENT OF DEFENSE, et al., Defendants.

Civil Action No. 16–cv–1433 (CKK)

United States District Court, District of Columbia.

Signed October 3, 2016

Bradley K. Ervin, Kayleigh Marie Scalzo, Mark W. Mosier, Edwin Donald Elliott, Jr., Covington & Burling LLP, Washington, DC, for Plaintiffs.

Matthew Joseph Berns, U.S. Department of Justice, Washington, DC, Michael Andrew Zee, U.S. Department of Justice, San Francisco, CA, for Defendants.

MEMORANDUM OPINION

(October 3, 2016)

COLLEEN KOLLAR–KOTELLY, United States District Judge

In this case, Plaintiffs Huntco Pawn Holdings, LLC ("Huntco") and the National Pawnbrokers Association ("NPA") (collectively "Plaintiffs") challenge the decision of the United States Department of Defense ("Department") to amend a regulation that places certain limitations on the credit that can be extended to Military Service members and their dependents. The Department amended the regulation, which implements the Military Lending Act, 10 U.S.C. § 987 ("MLA"), to broaden the scope of the credit transactions that these limitations apply to and to amend a "safe harbor" the Department believed was being misused. Before the Court is Plaintiffs' [17] Motion for Preliminary Injunction. Plaintiffs ask the Court to enter an order enjoining the implementation of the regulation as it applies to pawnbrokers. In the alternative, Plaintiffs ask the Court to order that the previously available safe harbor be retained with respect to pawn transactions.

Upon consideration of the pleadings,¹ the relevant legal authorities, and the record for purposes of this motion, the Court DENIES Plaintiffs' [17] Motion for Preliminary Injunction. First, the Court concludes that Plaintiffs have not shown a likelihood of success on the merits. The Court finds that the Department adequately responded to NPA's requests that pawnshops be exempted from the MLA or, in the alternative, that pawnshop-specific fees be exempted from the calculation of the permissible interest rate under that law. The Department's rulemaking also does not appear to have been arbitrary or capricious with regard to its decision to revise the safe harbor it had previously made available, or with respect to its certification under the Regulatory Flexibility Act ("RFA") that the new regulation would not have a significant economic impact on a substantial number of small entities. Finally, the Court is not persuaded that the signature block associated with the regulation in the Federal Register demonstrates that the regulation was issued in excess of statutory authority.

With respect to the other equitable factors the Court must consider in evaluating a motion for a preliminary injunction, the Court concludes that Plaintiffs have not demonstrated that they will suffer irreparable harm absent injunctive relief. The economic harms Plaintiffs claim will befall them are either applicable to only a very small subset of pawnshops' customers, highly speculative, insufficiently supported or contradicted by Plaintiffs' declarations. Finally, Plaintiffs have also not shown that the equities tip in their favor, or that the issuance of the requested injunction would be in the public interest. Accordingly, the Court determines that Plaintiffs have not met their burden of showing that a preliminary injunction is warranted.

I. BACKGROUND

This case revolves around regulations promulgated by the Department to implement the MLA. The Court accordingly provides a brief review of the relevant statutory and regulatory background as is necessary to resolve the pending Motion for Preliminary Injunction.

A. The Military Lending Act

In 2006, the Department submitted a report to Congress regarding lending practices that it concluded "undermine[ ] military readiness, harm[ ] the morale of troops and their families, and add[ ] to the cost of fielding an all-volunteer fighting force." DEPARTMENT OF DEFENSE , Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents 53 (Aug. 9, 2006), http://archive.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf ("2006 Report"). The 2006 Report concluded that "[p]redatory lending practices are prevalent and target military personnel," and recommended that Congress pass various "protections against predatory lending to Service members." Id. at 4, 45. The 2006 Report addressed three types of high-cost, short-term loans: "payday, car title, and tax refund anticipation loans." Id. at 4.

In response, Congress enacted the MLA. The MLA prohibits extensions of "consumer credit" to covered members of the Military and their dependents that "impose an annual percentage rate of interest greater than 36 percent." 10 U.S.C. § 987(a) - (b).² A lender who violates the MLA is subject to civil liability, including actual damages, punitive damages and costs. Id. at § 987(f)(5). "A person may not be held liable," however, "if the person shows by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." Id. at § 987(f)(5)(D). Violations are also punishable as misdemeanors, but only if a creditor "knowingly violates" the statute. Id. at § 987(f)(1).

Congress directed the Secretary of Defense to prescribe various regulations to "carry out" the MLA. Id. at § 987(h). Among other things, the MLA states that these regulations "shall establish" the following:

(B) The method for calculating the applicable annual percentage rate of interest on such obligations, in accordance with the limit established under this section.

(C) A maximum allowable amount of all fees, and the types of fees, associated with any such extension of credit ...

(D) Definitions of ... "consumer credit" ...

(E) Such other criteria or limitations as the Secretary of Defense determines appropriate, consistent with the provisions of this section.

Id. at § 987(h)(2)(B)–(E). In prescribing these regulations, Congress ordered the Department to consult with the Federal Trade Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Bureau of Consumer Financial Protection, the National Credit Union Administration and the Treasury Department. Id. at § 987(h)(3).

B. The Regulatory History

1. The Department's Initial Regulations

The Department first adopted regulations to implement the MLA in 2007. Limitations on Terms of Consumer Credit Extended to Service Members and Dependents , 72 Fed. Reg. 50580 (Aug. 31, 2007) (JA00016–30) ("2007 Rule"). Among other things, the 2007 Rule defined the types of "consumer credit" transactions covered by the MLA, explained the types of costs included in determining whether the Military Annual Percentage Rate ("MAPR") exceeded 36 percent, and provided a method lenders could use to identify covered borrowers. JA00028–29.

First, the 2007 Rule defined "consumer credit" to include only the three particular types of short-term loans that were the focus of the 2006 Report: (1) payday loans, (2) vehicle title loans, and (3) tax refund anticipation loans. JA00028. Accordingly, under the 2007 Rule, the MLA only applied to these three types of loans.

Second, the 2007 Rule stated that the MAPR included, among other things, "interest, fees, credit service charges, [and] credit renewal charges," to the extent these costs were "required to be paid as a condition of the credit." Id.

Third, the 2007 Rule provided a method for the "identification of a covered borrower." Lenders who obtained a certification from a borrower that the borrower was not a covered Service member, or the dependent thereof, were protected by a "safe harbor" from liability under the MLA ("Self–Certification Safe Harbor").³ JA00029. The Department also provided two "optional verification procedures": (1) a lender could "but [was] not required to, verify the status of an applicant as a covered borrower by requesting the applicant to provide a current (previous month) military leave and earning statement, or a military identification card," or (2) the lender could, "but [was] not required to, verify the status of an applicant as a covered borrower by accessing the information available at http://www.dmdc.osd.mil/mla/owa/home. Searches require[d] the service member's full name, Social Security number, and date of birth." Id. These methods were available to the lender, but did not provide a safe harbor from liability under the MLA.

2. The Department's Revised Regulations

a. Advanced Notice of Proposed Rulemaking

On June 17, 2013, the Department issued an Advanced Notice of Proposed Rulemaking "regarding enhancement of the protections that apply to consumer credit extended to members of the armed forces and their dependents." Limitations on Terms of Consumer Credit Extended to Service Members and Dependents , 78 Fed. Reg. 36134 (June 17, 2013) (JA00070) ("ANPR"). The Department requested "comment on the need to revise the Department's existing regulation that, in general, imposes certain limits on and requires certain disclosures relating to the provision of consumer credit to a covered borrower." Id.

The ANPR contained an excerpt from the Conference Report on a bill entitled National Defense Authorization Act for Fiscal Year 2013, which stated that "[t]he conferees recognize the progress the Department of Defense has made since consumer protections for military members and their dependents against predatory lending were enacted in the [MLA]." Id. The conferees noted that "[a] recent report by the Consumer Federation of America, The Military Lending Act Five Years Later, found that ‘the law has been largely effective in curbing predatory ... lending to covered borrowers." Id. However, it noted that the report also "found that many predatory lenders have modified their products to avoid coverage by the...