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Huntco Pawn Holdings, LLC v. Department of Defense

United States District Court, District of Columbia

October 3, 2016

HUNTCO PAWN HOLDINGS, LLC, et al., Plaintiffs
U.S. DEPARTMENT OF DEFENSE, et al., Defendants.


          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), al.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 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 Department's rules implementing” the MLA. Id. The Conference Report suggested that the Department “review its regulations implementing [the MLA] to address changes in the industry and the evolution of lending products . . . .” Id.

         On August 1, 2013, the Consumer Federation of America (“CFA”), in conjunction with other organizations, filed a public comment in response to the ANPR. JA00072. The comment suggested that the definition of “consumer credit” should be expanded to apply to all consumer credit regulated under the Truth in Lending Act (“TILA”). Id. Attached to this comment was a report prepared by the CFA on May 29, 2012, referenced in the ANPR, entitled The Military Lending Act Five Years Later: Impact on Service Members, the High-Cost Small Dollar Loan Market, and the Campaign Against Predatory Lending (“CFA Report”). The CFA Report found that the MLA had been “largely successful in curbing abusive lending” to the extent it took the form of the “three specific products” covered by the 2007 Rule, but that the “restrictive definitions of ‘consumer credit' in [the Department's] rules left loopholes to be exploited.” JA00096-97. It concluded that the definition of “covered credit” should be expanded to close these loopholes. JA00097-98. The CFA Report also stated that “[c]ounselors knew of cases where prohibited loans were still obtained, ” in part as a result of “falsified applications.” JA00111.

         b. Notice of Proposed Rulemaking

         On September 29, 2014, the Department issued a Notice of Proposed Rulemaking regarding proposed amendments to the 2007 Rule. Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 79 Fed. Reg. 58602 (Sept. 29, 2014) (JA00207-45) (“NPR”). Noting concerns regarding the “extremely narrow definition of ‘consumer credit, '” JA00207, the Department proposed to amend its “existing regulation primarily for the purpose of extending the protections of the MLA to a broader range of . . . credit products, ” JA00206. “More specifically, the Department propose[d] to amend its regulation so that, in general, consumer credit covered under the MLA would be defined consistently with credit that for decades has been subject to the protections under the Truth in Lending Act (TILA), namely: Credit offered or extended to a covered borrower primarily for personal, family, or household purpose, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.” Id. This definition brought pawn loans within the scope of the MLA for the first time.

         The Department also proposed revising the Self-Certification Safe Harbor. The Department stated that it had “become aware of misuses of the covered borrower identification statement whereby a Service member (or covered dependent) falsely declares that he or she is not a covered borrower, ” or “unwittingly incorrectly complete[s]” the statement, ” and stated that it believed the regulation should be revised to “relieve a Service member or his or dependent from making any statement regarding his or her status as a covered borrower.” JA00218. The Department also proposed a new “conclusive mechanism” to determine whether an applicant was a covered borrower, whereby the lender would check the MLA Database to determine the consumer-applicant's status. Id. “If a creditor conducts a covered borrower check” through the MLA Database, the creditor “would be free from liability under the MLA” even if “that consumer, in fact, [was] a covered borrower.” JA00219.

         Finally, the Department “certifie[d] that this proposed regulation is not subject to the Regulatory Flexibility Act [ ] because the regulation, if adopted as proposed, would not have a significant impact on a substantial number of small entities.” JA00239. The Department reasoned that “[w]hile a substantial portion of firms in each affected market are ‘small business entities' Service members and their dependents make up only a small portion of the consumers for those businesses. Because only approximately 2.5 percent of households in the United States include an active duty Service member, the interest rate limits and other MLA conditions of the proposed regulation would affect a small percentage of the consumers served . . . .” Id. The Department requested comments on these conclusions. Id.

         c. Public Comments

         i. The NPA's Public Comment

         On November 24, 2014, Plaintiff NPA submitted a public comment in response to the NPR. The NPA is a national trade association representing the interests of pawnbrokers. JA00246. In its comment, NPA explained the nature of pawn loans. When an individual brings an item to a pawnshop, he or she has essentially two options: to sell the item outright, or to pledge the item with the option to repurchase it after a period of time, plus a finance charge. JA00279 (public comment of EZCORP, another operator of pawnshops); JA00247-48. The latter option is referred to as a pawn loan. Id.

         NPA advanced two major arguments in its public comment. First, NPA argued that the definition of “consumer credit” should not be expanded such that it would include pawn loans because pawn loans were different and less harmful to Service members than most other high-cost lending transactions. JA00247-49. One of the primary distinguishing features the NPA cited was the “non-recourse” nature of pawn loans. JA00248-49. In other words, the pawnbroker's only recourse in the event the consumer does not repay the loan is to retain, sell or otherwise dispose of the personal property left with the pawnshop. Id. The NPA also asserted that pawnbrokers do not usually run credit checks on potential borrowers, nor do they report their loan transactions to credit reporting agencies, which means that pawn loans generally do not directly affect the borrower's credit. JA00248; JA00256-57. Finally, NPA also argued that pawn loans are simple to understand, generate few complaints, and are already heavily regulated at the state and local level. JA00247-49.

         Second, if the Department decided to apply the MLA to pawnbrokers, NPA argued that certain fees that pawnbrokers charged borrowers should be excluded from the calculation of the MAPR. JA00251. These included certain “pass-through fees” and taxes that pawnbrokers collect and remit to Government entities, storage charges, appraisal fees and insurance charges. JA00052-53. For the most part, NPA argued that these fees should not be counted when calculating the MAPR because they are necessary incidents of pawn lending and “protect” both the pawnbroker and the consumer.[4] Id.

         ii. The Office of Advocacy of the United States Small Business Administration's Public Comment

         The Office of Advocacy of the United States Small Business Administration (“Advocacy”) also submitted a public comment regarding the proposed rule. Advocacy stated that it was “concerned about the factual basis for” the Department's certification that the Rule would not have a “significant economic impact on a substantial number of small entities.” JA00288. In particular, Advocacy argued that the assumption that “the proposed regulations would affect a small percentage of the consumers served by” small businesses because “only approximately 2.5 percent of households in the United States include an active duty Service member” did not take into account compliance costs associated with the revised safe harbor provision, because “[i]n order to benefit from the safe harbor, a business that offers financial credit products that exceed the 36 percent rate would need to check every applicant, not just members of the military and their dependents.” JA00289. Advocacy also recommended “small entities be allowed to continue to operate under a safe harbor that requires military members and their dependents to self-identify.” JA00290.

         d. The Final Rule

         The Department issued the final version of the Proposed Rule on July 22, 2015. Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 80 Fed. Reg. 43560 (July 22, 2015) (JA00458-510) (“Final Rule”). The Final Rule adopted the Proposed Rule's expanded definition of “consumer credit, ” determined that fixed fees should be included in the calculation of MAPR with narrow exceptions, and replaced the Self-Certification Safe Harbor with the revised safe harbor the Department had proposed based on lenders conducting covered-borrower checks through the MLA Database. JA00505-07. The Department also addressed Advocacy's concerns regarding the Final Rule's effects on small businesses, but still determined that the Rule would not have a “significant economic impact on a substantial number of small entities.” JA00502-04.

         C. Plaintiffs' Allegations in this Case

         The Final Rule went into effect on October 1, 2015, but compliance was not required until October 3, 2016. Plaintiffs filed this lawsuit on June 12, 2016. Complaint for Declaratory and Injunctive Relief, ECF No. 1. Plaintiffs' Second Amended Complaint, which is the operative complaint for the purposes of this Motion, [5] asserts several causes of action for violations of the Administrative Procedures Act (“APA”) and the Regulatory Flexibility Act (“RFA”). Second Amended Complaint for Declaratory and Injunctive Relief (“Compl.”), ECF No. 27, Ex. A at ¶¶ 1, 114-53. Specifically, Plaintiffs argue that Defendants violated the APA by (1) failing to respond to comments requesting an exemption from the MLA for pawnbrokers, (2) failing to respond to comments requesting that certain fees associated with pawn loans be exempted from the calculation of MAPR, (3) failing to provide a rational explanation for, or respond to comments about, revising the regulation's safe harbor provision, (4) failing to provide a rational response to Advocacy's comments regarding the Department's RFA certification, and (5) issuing the Final Rule in excess of statutory authority. Compl. ¶ 14.

         Plaintiffs filed the pending Motion for Preliminary Injunction on September 2, 2016, asking the Court to enter an order enjoining application of the Final Rule to pawnbrokers. Pls.' Mot. at 43. In the alternative, to the extent the Final Rule is applied to pawnbrokers, Plaintiffs ask that the previously available Self-Certification Safe Harbor be retained as to pawnbrokers. Id. Plaintiffs requested a decision on this Motion by October 3, 2016, the date by which compliance with the Final Rule is required. Id.


         “A preliminary injunction is ‘an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.'” Sherley v. Sebelius, 644 F.3d 388, 392 (D.C. Cir. 2011) (quoting Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 22 (2008)); see also Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (“[A] preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.”) (emphasis in original; quotation marks omitted). “A plaintiff seeking a preliminary injunction must establish [1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Aamer v. Obama, 742 F.3d 1023, 1038 (D.C. Cir. 2014) (quoting Sherley, 644 F.3d at 392 (quoting Winter, 555 U.S. at 20) (alteration in original; quotation marks omitted)). “‘When seeking a preliminary injunction, the movant has the burden to show that all four factors, taken together, weigh in favor of the injunction.'” Abdullah v. Obama, 753 F.3d 193, 197 (D.C. Cir. 2014) (quoting Davis v. Pension Benefit Guar. Corp., 571 F.3d 1288, 1292 (D.C. Cir. 2009)). “The four factors have typically been evaluated on a ‘sliding scale.'” Davis, 571 F.3d at 1291 (citation omitted). Under this sliding-scale framework, “[i]f the movant makes an unusually strong showing on one of the factors, then it does not necessarily have to make as strong a showing on another factor.” Id. at 1291-92.

         The Court notes that it is not clear whether this Circuit's sliding-scale approach to assessing the four preliminary injunction factors survives the Supreme Court's decision in Winter. See Save Jobs USA v. U.S. Dep't of Homeland Sec., 105 F.Supp.3d 108, 112 (D.D.C. 2015). Several judges on the United States Court of Appeals for the D.C. Circuit have “read Winter at least to suggest if not to hold ‘that a likelihood of success is an independent, freestanding requirement for a preliminary injunction.'” Sherley, 644 F.3d at 393 (quoting Davis, 571 F.3d at 1296 (concurring opinion)). However, the D.C. Circuit has yet to hold definitively that Winter has displaced the sliding-scale analysis. See id.; see also Save Jobs USA, 105 F.Supp.3d at 112. In any event, this Court need not resolve the viability of the sliding-scale approach today as the Court determines that “a preliminary injunction is not appropriate even under the less demanding sliding-scale analysis.” Sherley, 644 F.3d at 393.

         III. ...

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