America’s armed forces personnel will no longer be exposed to exploitative payday loans after the Department of Defense (DOD) put new, long-delayed rules into place on Tuesday. The news marks a victory for an idea that had seemed at risk of being killed just months ago by lawmakers friendly to the lending industry.
President Obama announced the changes Tuesday in a speech to the Veterans of Foreign Wars convention in Pittsburgh, calling the rules part of the fight “to give our troops and veterans every chance to enjoy the American dream you helped defend.” The Military Lending Act (MLA) of 2007 was intended to protect servicemembers’ families from financial exploitation.
“But I have to tell you, some of the worst abusers, like payday lenders, are exploiting loopholes to trap our troops in a vicious cycle of crushing debt,” Obama said. “So today we’re taking a new step. The DOD is closing those loopholes so we can protect our men and women in uniform from these predatory lenders.”
Lenders have consciously targeted military servicemembers in the past, as the Consumer Financial Protection Bureau’s top official for military affairs noted in a statement about the revised rules.
“When I drive down the strip outside a military installation and count 20 fast-cash lenders in less than 4 miles, that’s not a convenience, that’s a problem,” the CFPB’s Holly Petraeus said. “I commend [DOD] Secretary [Ash] Carter for taking this important step to make the Military Lending Act more effective.”
The original rules applied only to loans of relatively brief duration and relatively low dollar amounts. Lenders responded by rejiggering their business model to sidestep the rules, using longer loan terms or larger principal amounts that weren’t regulated to continue locking military families into usurious loans.
Multiple studies between 2007 and 2014 revealed the vast negative consequences of this ongoing financial exploitation for members of the armed services. Late last year, Pentagon officials proposed revised rules that would eliminate the loopholes relating to the time, value, and style of loans made to soldiers, sailors, airmen, Marines, and their families. But Congress responded with that rarest of things in American politics: public opposition to an idea that would benefit men and women in uniform.
First, Rep. Joe Heck (R-NV) tucked a provision delaying the new rules for another year into the National Defense Authorization Act (NDAA) during a late-night committee markup session. Since the NDAA is considered must-pass legislation, and opportunities to amend it on the floor of the House are rare once the relevant committees have passed along a finished draft to the full body, Heck seemed briefly to have succeeded in keeping the Pentagon’s rules at bay for another business year.
But Rep. Tammy Duckworth (D-IL), a double-amputee veteran of the Iraq war, blew up the amendment and successfully whipped to take the delay provision back out of the NDAA in a subsequent committee meeting. The vote was extremely close — 32-30 in favor of stripping the delay language out of the bill — and seemed to demonstrate a significant constituency in the House GOP majority for stymieing the protections that Defense officials seek.
Two weeks after Heck’s failure, Rep. Steve Stivers (R-OH) tried again, this time on the floor. Stivers, who got $42,500 in campaign contributions from payday lenders and their trade associations in the 2014 election cycle, also failed to keep the loopholes open.
Neither Stivers nor Heck responded to requests for comment on Tuesday’s announcement about the MLA reforms.
The expanded rules will protect servicemembers at a time when civilians’ relationship with small-dollar credit products is also in flux. The CFPB is actively pursuing the first-ever nation-wide regulations on payday and auto title loans, and the initial document they’ve produced as a roadmap to their thinking indicates that they will take a moderate path.
Rather than capping interest rates at 36 percent APR — as the MLA does for Pentagon employees, and as many states do to effectively ban payday lending — the agency appears set to establish a subtler set of rules about industry business practices that tend to create debt traps when left unchecked. That approach has brought average interest rates on payday loans in Colorado down to about one-third of the national average, while still allowing lenders to operate and make money.
But despite the CFPB’s apparent moderacy, industry operatives are misrepresenting the effort as a crusade to destroy payday lending outright and leave low-income families neglected by traditional banks to turn to loan sharks.