TX District Court Holds That Bona Fide Error Defense Does Not Apply to Agency Enforcement Actions Under Military Lending Act

The U.S. District Court for the Northern District of Texas ruled that a “bona fide error” defense in the Military Lending Act only applied to claims in private civil actions and not to agency enforcement actions.

The CFPB brought an enforcement action against a nationwide chain of pawn shops alleging that the company made loans to active duty military servicemembers that violated the Act, including by charging interest rates above a limit prescribed in the statute.  The company asserted, as an affirmative defense, that it was not liable since it had unintentionally violated the Act as the result of a “bona fide error.”

The section of the statute creating a civil cause of action for affected persons states that a defendant “who violates this section with respect to any person is civilly liable to such person” for certain types of remedies, but that a defendant is not liable if “the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.”  A different section of the Act which gives government agencies the right to bring enforcement actions does not include a similar bona fide error provision.

The court held that the bona fide error defense shields a lender from civil liability to affected borrowers for the remedies listed in that section of the Act, but that this section does not address enforcement actions by government agencies.  Agencies bring their enforcement actions under different statutory grants of authority.  Further, the court noted that the types of relief in the section to which the bona fide error defense applies are different from the types of remedies that an agency seeks in an enforcement action.