The men and women who wear our nation’s uniform are expected to defend our nation at home and abroad. Yet, when it comes to financial services, service members are not always being protected in return.
The 2006 Military Lending Act (MLA) was enacted with broad and bipartisan support as a remedy to predatory lending that diminished military readiness. The first major step to provide financial protection to our armed forces was to limit interest rates and fees to no more than 36 percent rate cap for consumer credit. This rate cap initially applied to just three types of products: tax refund loans, and both payday and auto title loans. The law also prescribed limits of indebtedness for payday loans less than 90 days and auto title loans with terms less than 180 days.
Loophole in the law
MLA’s specific lending prescriptions had the unexpected result of lenders changing loan terms beyond the MLA’s provisions, sometimes by as little as an extra day. While technically observing the letter of the law, these profiteers exploited a lending loophole to continue entrapping active duty service members in predatory lending products.
Last fall, the Department of Defense (DOD) proposed MLA broaden proposed amendments to existing regulations that would better ensure against evasive practices of predatory lending. These proposals are supported by the military community, Congressional leaders, state attorneys general as well as consumer and civil rights groups across the country.
Even so, this year some members of Congress inserted into the 2016 National Defense Authorization Act a short clause that would have given predatory lenders the opportunity to prolong their exploitative practices and also delay in implementing new regulations by the Secretary of Defense. The surprise move also undermined DOD’s previous findings that predatory lending is a threat to our national security.
Fortunately, and largely through the leadership of a veteran, Illinois’ Congresswoman Tammy Duckworth, offered an amendment to the proposed authorization to preserve DOD’s regulatory plans.
After 18 hours of debate, enough support was gathered to remove the harmful language.
A 32-30 vote by the House Armed Services Committee removed the harmful language as the measure proceeds to the House floor for a final vote. The Duckworth amendment will enable stronger regulation to move forward. The goal of ensuring effective regulation of predatory lending aimed at active duty military families and will include new safeguards affecting credit cards, high-cost installment loans and payday loans offered by banks that are termed ‘deposit advances.’
Working with the Office of Service Member Affairs, CFPB published a December report that found:
•Some depository institutions extended millions of dollars in deposit advances to service members with APRs that typically exceeded 300 percent. As open-ended lines of credit, the loans were not bound by the MLA;
•In Illinois, a 12-month auto title loan of $2,575 carried a finance charge of $5,720 plus a $95 lien fee. The loan was technically legal because its duration was beyond 181 days;
•In Texas, a lender sold a $485 installment loan to a service member with a 584.72 APR for a period of less than six months. In addition to the borrower’s $1,428 repayment, the borrower was charged a separate credit access business fee and 9.75 percent interest on the loan.
“The products that have been marketed and extended to service members while the current Military Lending Act regulations have been in place underscore the limitations of those regulations in protecting service members and their families across the credit marketplace,” states CFPB’s report. “This issue is of substantial concern to the Bureau and we will continue to use the tools available to us to address the consumer financial challenges affecting the military community.”
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.firstname.lastname@example.org.