Kathy Kraninger, the director of the Consumer Financial Protection Bureau, is in a standoff with Senate Democrats over the bureau’s refusal to examine financial firms for compliance with the Military Lending Act.
Kraninger is said to be unwilling to reverse a policy decision made in 2018 by Mick Mulvaney, her former boss who ran the CFPB on an acting basis, according to sources who have met with the CFPB on the issue. Both leaders have stuck to the claim that the agency lacks authority to conduct MLA exams.
The issue is further complicated by President Trump, who wants to be seen as standing up for the military even as Kraninger comes under pressure from military groups to protect service members from financial fraud and predatory lending.
At the same time, Democrats led by Sen. Jack Reed, D-R.I., do not support reopening the Military Lending Act to make the CFPB's supervision authority more explicit, because doing so could lead financial firms to try to weaken the law's 36% annual percentage rate cap for military personnel.
"A plain reading of the current law provides all the necessary authority for the CFPB to conduct, as it has since at least 2013, MLA examinations of payday lenders and other institutions," said Paul Kantwill, distinguished professor in residence at Loyola University Chicago School of Law and a former CFPB assistant director of the Office of Servicemember Affairs, who helped amend the MLA in 2015.
Auto lenders and dealerships have already been lobbying the Defense Department and the CFPB to ease the 36% cap. For example, auto loans currently enjoy an exemption from the cap if they do not cover guaranteed asset protection, but the industry wants that exemption expanded to include auto loans with GAP insurance as well.
The MLA, enacted by Congress in 2006, initially applied to a narrow range of payday, auto title and tax-refund anticipation loans. It was broadened in 2015 to include credit cards, installment loans and overdraft lines, all subject to the 36% cap.
For years, the prevailing legal opinion of the CFPB’s general counsel, and other offices in the bureau, was that a provision in the Dodd-Frank Act allows the CFPB to examine and supervise businesses under its jurisdiction for “risks to consumers.” That specific wording in Dodd-Frank is not limited to any specific statute.
In 2013, the bureau under former CFPB Director Richard Cordray changed its supervision manual to state that examiners should “review for MLA violations and their related risks to consumers.”
The bureau conducted supervisory exams for MLA compliance for five years until 2017, when acting CFPB Director Mick Mulvaney put a halt to them. Mulvaney argued that the MLA was not a federal consumer financial protection statute and therefore Dodd-Frank did not grant the CFPB supervisory authority. He maintained that Congress needed to pass legislation to give the bureau explicit authority to conduct military lending exams.
But many lawmakers involved in both the MLA and Dodd-Frank are frustrated that Kraninger is calling for a legislative fix where they think none is needed. (The CFPB did not respond to requests for comment.)
“I’m arguing you already have the authority,” Sen. Catherine Cortez Masto told Kraninger at a Senate hearing in March. “It’s a change in the CFPB’s position and that’s why many attorneys general, military organizations, including Democrats on this committee and in the Senate are challenging why you made this change.”
Cortez Masto was one of 48 senators led by Reed who sent a letter in March to Kraninger opposing her decision on the MLA.
"The reason so many people do not support a change in legislation is because they simply don’t need one," Kantwill said.
Kraninger also appears to be going against the advice of the CFPB’s general counsel, Mary McLeod, who has argued that the agency does not need Congress to intervene. “One possible reading of the statute would allow that the Bureau may seek to uncover and remedy violations of the MLA in the course of exercising its authorities pursuant to" specific sections of Dodd-Frank, McLeod wrote in a legal summary.
As congressional Democrats have dug in on the issue, the automobile industry has sought to ease the MLA's pricing restrictions.
In March, Kraninger met with Peter Welch, CEO of the National Automobile Dealers Association, according to her calendar. The dealer trade group specifically wants the Defense Department to repeal a 2017 interpretive rule that imposes the 36% cap on loans that include "credit-related costs" such as GAP coverage. Under the MLA, car loans without such added costs are exempt.
NADA claims it is not looking to reopen MLA. “We are not asking, nor have we asked, for a change to the statute,” said Jared Allen, a spokesperson for the auto trade group.
Christopher Peterson, director of financial services and a senior fellow at the Consumer Federation of America, said auto dealers typically charge from $600 to $800 for GAP insurance when it is purchased through a car loan, while the average cost to purchase GAP coverage directly from an insurer is just $30 to $70 a year.
“It’s an important part of car dealers’ business models that increasingly rely on selling extra products to increase revenue,” said Peterson, a former CFPB special adviser.
Credit unions that offered GAP insurance and debt consolidation packages would benefit from exemptions from CFPB oversight and from changes made to the MLA so they could continue to offer such products, said Tony Hernandez, president and CEO of the Defense Credit Union Council, which represents 181 credit unions with branches on every major U.S. installation.
“What I’m concerned about is there are things in the MLA that we could do better to protect our service members that need help and don’t come to us with financial readiness skills,” Hernandez said.
Some lawyers have argued that the CFPB’s refusal to conduct MLA exams could mean the bureau also believes it does not have authority over other statutes such as the Servicemembers Civil Relief Act, or SCRA, that also is not a federal consumer financial law.
“This really has to do with a quirk in the way that Dodd-Frank was structured,” said Keith Bradley, a partner at Squire Patton Boggs. "For whatever reason, Congress chose not to give every law about consumer protection in finance the same status at the CFPB.”
Still, he noted that prudential financial regulators have long supervised for compliance in many areas on the ground that compliance problems pose risks to an institution’s reputation and soundness generally.
The Dodd-Frank Act was written against that background, Bradley said.
"Given that history, when you look at the Bureau’s supervisory authority, you can see why the Bureau used to think its examiners could check for MLA violations.”
