September 30, 2014 10:24 AM UTC

Department of Defense Extends Restrictions on Predatory Lending

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• by: TheBell

The U.S. Department of Defense (DoD) released a proposal on Friday that would extend restrictions on predatory lending, which traps many active-duty service members and their dependents. The proposed rule would expand the number of lending products covered by the military’s 36 percent interest rate cap, and it would close loopholes that lenders have used to get around the current rate cap.

“This is a strong rule that closes loopholes and ends the debt trap for military borrowers,” said Rich Jones, director of policy and research at the Bell Policy Center. “Because it applies to products that are subject to the Truth in Lending Act, it prevents lenders from getting around it in the future and extends protections to more forms of credit.”

Colorado has implemented successful reforms of payday lending, but the new rule would apply here as well. It would limit the interest and fees that military borrowers could be charged to 36 percent APR.  Because loans here have a minimum six-month term, they are currently exempt from the DoD’s 36 percent rate cap. According to data from the Attorney General’s Office, in 2012, Colorado’s payday loans had an average effective rate of 129 percent APR.

The Consumer Financial Protection Bureau strongly supports the department’s proposed rules, as do a wide range of consumer groups, including the Center for Responsible Lending, Consumer Federation of America and the National Consumer Law Center.

 “As one of the agencies charged with enforcing the Military Lending Act, we have seen firsthand how lenders use loopholes to prey on members of the military,” said Richard Cordray, director of the CFPB.

Congress passed the Military Lending Act with bipartisan support in 2006 to protect active-duty service members and their dependents from abusive credit practices and high-interest predatory loans. It capped loans at 36 percent and gave DoD authority to determine the kinds of loans covered by the law. DoD limited the loans that were covered to (1) closed-end payday loans for no more than $2,000 and with a term of 91 or fewer days; (2) closed-end auto title loans with a term of 181 or fewer days; and (3) closed-end tax refund anticipation loans. In closed-end loans, the borrower receives the full amount of the loan up front and must repay it, including interest and other charges, by a specific date.  

Because the loans subject to the 36 percent rate cap were defined narrowly, lenders made minor changes in their products, such as extending the term for payday loans beyond 91 days, to get around the cap. According to the CFPB, some lenders tweaked their products and continued to sell military families products with annual percentage rates as high as 500 percent.

The new rules will extend the 36 percent rate cap (referred to as the Military Annual Percentage Rate) to all types of credit that are already subject to protections of the Truth in Lending Act.  These include all payday, credit card, auto title and most forms of installment loans. The Military Lending Act specifically exempted residential mortgages and loans used to buy items such as cars.  Because the protections include the broad range of products subject to the Truth in Lending Act, the DoD will not have to constantly rewrite the rules as lenders make changes in their products.

Under the law, lenders also have to provide military borrowers with additional disclosures and are prohibited from requiring service members to submit to arbitration or waive their rights under the Service Members’ Civil Relief Act. Lenders also cannot impose onerous legal requirements on them.

The proposed rule is to be published in the Federal Register today, and the public will have 60 days to comment on it.  It is expected to go into effect by next year.

– Rich Jones, director of policy and research