Pawnbrokers Say New Lending Law Is Ruinous

     WASHINGTON, D.C. (CN) — Pawn shop owners could be ruined by a Defense Department rule that limits how lines of credit are extended to service members, according to a lawsuit filed in federal court.
     At issue is a 2015 amendment to the 2007 Military Lending Act that requires pawn shops to check an online military database before issuing loans to make sure borrowers aren’t covered by the law, which limits how much interest pawnbrokers can charge on loans to service members.
     Plaintiff Huntco Pawn Holdings says abiding by the new rule would be too costly for many smaller pawnbrokers.
     The St. Louis-based pawnbroker filed its lawsuit Tuesday in the U.S. District Court for the District of Columbia hoping to invalidate the 2015 rule, claiming many pawnbrokers don’t use computers in everyday business.
     Under the previous rule, pawn shops were granted safe harbor if they obtained a signed certification from a borrower that he or she is not covered by the MLA. The 2015 rule now requires pawn shops to do the legwork themselves to verify whether borrowers are covered.
     The new rule “supplant[s] the MLA’s previous safe harbor provision in a manner that would be economically ruinous for small pawn businesses” because most pawn shops “do not collect Social Security numbers, often lack computer access, and engage in much higher volume of transactions than other providers of financial services,” the lawsuit states.
     Under the new rule, pawn shops would also have to purchase and configure the necessary software, retrieve certificates from the MLA database, and download database responses for every pawn transaction, the lawsuit adds.
     Huntco Pawn says this process could take five to 10 minutes per loan application.
     The lawsuit also disputes data cited by Defense Department officials that some pawn shop borrowers had falsely signed certifications that they weren’t covered by the MLA. According to the complaint, “There is no data in the record indicating that the previous safe harbor has been inadequate. DOD provided no data to support the statement that service members would lie, nor did it make any such data available for comment.”
     Pawn shops, which offer loans in exchange for property as collateral, are different from other lenders because there is typically no obligation to pay back the loan, and as such pawn shops face fewer regulations. Most pawnbrokers do not check a borrower’s consumer line of credit or credit reports.
     However, pawn shop loans often are smaller than other loans, such as payday loans, and are considered an attractive option for those hard up for quick cash. And data shows that active and retired military members use small-amount loans often. A 2014 survey by the Defense Department found that 41 percent of enlisted service members said they used small-dollar lending in the last year
     But critics claim that pawn shop loans can be abusive, especially since many pawnbrokers set up shop just outside of military bases. A class-action lawsuit filed in 2011 accused an auto-title pawn shop outside of Fort Benning in Georgia of making predatory loans.
     In response, the Defense Department revisited the MLA and finalized regulations to impose stricter requirements on all financial institutions, including pawnbrokers.
     The National Pawnbrokers Association also opposes the new law. “Pawnbrokers help working Americans keep the electricity on, the rent paid, and cars running during hard times of everyday life,” the association’s counsel, Cliff Andrews, argued in a letter to President Obama about the new law.
     Members of the Army, Navy, Marine Corps, Air Force, and Coast Guard—as well as their dependents—are covered under the MLA. Pawn shops that don’t comply with the new rule face civil and criminal penalties.
     The new rule takes effect Oct. 3, 2016.