The U.S. Department of Defense has issued a proposal that would expand the types of credit products that are covered by the 36-percent rate cap and other military-specific protections under the Military Lending Act. The proposal would close loopholes that have led to lenders skirting the law with products that fall outside the scope of existing regulations.
Consumer Financial Protection Bureau (CFPB) Director Richard Cordray issued the following statement:
“I applaud Secretary [Chuck] Hagel and the Department of Defense for their hard work in crafting this important proposal. The CFPB strongly supports the Department’s efforts to provide broad and long-lasting consumer protections for our nation’s military families.
“As one of the agencies charged with enforcing the Military Lending Act, we have seen firsthand how lenders use loopholes in the rule to prey on members of the military. They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule.
“This proposal would shut down the predatory lending to the military that has flourished through exploiting legal technicalities. By broadening the types of credit covered under the law, this proposal would carry out the will of Congress by enabling the CFPB to stop lenders from harming servicemembers in ways the law was intended to stop.
“Our ongoing enforcement of the Military Lending Act and our support for the Department’s efforts reflect the Bureau’s dedication to providing critical consumer protections to our men and women in uniform.”
Holly Petraeus, Consumer Financial Protection Bureau Assistant Director, Office of Servicemember Affairs, issued the following statement:
“I commend Secretary Hagel for taking this important step to make the Military Lending Act more effective. High-interest loans to the military have been a problem for many years. This problem reached a crisis as payday and other lenders began thronging outside the gates of military installations in ever-increasing numbers. In 2006, Congress acted against this threat to military financial and operational readiness by passing the Military Lending Act. This law was designed to protect active-duty servicemembers and their families from high-cost loans by capping rates at 36 percent.
“Unfortunately, less than a decade after that law was passed, those who would profit by charging exorbitant rates to the military have found it all too easy to evade the original intention of the Military Lending Act. Taking advantage of loopholes, lenders have continued to charge military families annual percentage rates as high as 500 percent.
“Secretary Hagel and the Department’s actions today make it clear that they have serious concerns about these high rates charged to servicemembers, no matter what the loan is called or how it is defined. I hope that all who care about the financial well-being of our military families will come together to support this common-sense proposal.”
The Military Lending Act provides servicemembers and their dependents with specific protections for their “consumer credit” transactions. Among other protections, the law limits the annual rate on an extension of credit to 36 percent, provides for military-specific disclosures, and prohibits creditors from requiring a servicemember to submit to arbitration in the event of a dispute.
As initially implemented by the Department of Defense in 2007, the Military Lending Act protections apply to three narrowly-defined “consumer credit” products:
►Closed-end payday loans for no more than $2,000 and with a term of 91 days or fewer;
►Closed-end auto title loans with a term of 181 days or fewer; and
►Closed-end tax refund anticipation loans.
The Department of Defense’s proposal announced would amend the definition of “consumer credit” covered by the regulation to more closely align with the broad, traditional definition of that term in the Truth in Lending Act. More types of credit would be covered under this proposal. In accordance with the law, the proposed regulation would continue to exclude residential mortgages and credit extended to finance the purchase of, and secured by, personal property, such as vehicle purchase loans.
The Military Lending Act is implemented by the Department of Defense, and is enforced by the CFPB and other federal regulators. In September 2013, the CFPBreleased guidelines on how its examiners will identify consumer harm and risks related to MLA violations when supervising payday lenders. In November 2013, the Bureau took action against a payday lender, Cash America, for extending payday loans to servicemembers and their families in violation of the Military Lending Act.