NC Federal Court Holds Military Lending Act’s Arbitration Ban Inapplicable to Credit Extended Before Ban’s Effective Date

The U.S. District Court for the Eastern District of North Carolina concluded that the Military Lending Act’s (MLA’s) prohibition on arbitration does not apply to credit extended before the prohibition’s effective date.

The plaintiffs-borrowers, current and former military members, sued the defendant-lender, a large national bank, alleging various federal statutory and common law claims.  As relevant here, they alleged that the bank violated certain federal statutes (including the MLA) by retroactively rescinding interest and fee forgiveness when it imposed interest rate penalties on servicemembers after they exited active duty.  The court denied the bank’s motion to dismiss and motion to compel arbitration.  On interlocutory appeal, the U.S. Court of Appeals for the Fourth Circuit reversed and held that the parties’ arbitration agreements were enforceable as to all claims, except the MLA claims.  WBK covered the Fourth Circuit’s opinion here.

After the plaintiffs filed a second amended complaint, the bank again moved to compel arbitration.  This time, the district court granted the bank’s motion to compel arbitration and stayed the case pending arbitration.  In so deciding, the court rejected the plaintiffs’ contention that the MLA prohibits enforcement of the arbitration agreements as to all of their claims.  The MLA contains a provision that deems unenforceable any agreement to arbitrate a dispute involving the extension of consumer credit to a person covered by the act.  But this provision became effective as to credit cards in October 2017.  And a regulation promulgated under the MLA clarified that this provision does not have retroactive effect.

Accordingly, the court concluded that this MLA provision did not apply to the plaintiffs’ claims because their claims concerned card accounts that were opened before the provision’s effective date.  But because the order was issued by a magistrate judge, the plaintiffs have asked a district judge to review the decision.