The Department of Defense (DOD) is proposing a significant expansion of rules meant to shield military families from predatory lending in hopes of closing loopholes in a seven-year-old set of regulations that have left members of the armed forces vulnerable to unscrupulous financial companies.
The rules relate to the 2006 Military Lending Act (MLA), which set a 36 percent interest rate cap on loans to members of the military but left the DOD to define which sorts of financial products would be covered by the cap. In 2007, the Pentagon decided the cap would apply only to three types of lending products: three-month payday loans, six-month car title loans, and tax refund advance loans. The rules proposed on Friday would extend the rate cap to many other types of loans and get rid of the time period limitations on the 2007 rules.
The three, limited types of lending that the DOD proscribed in 2007 largely disappeared in the years after, according to a 2012 report, indicating that the law was effective in the places where it was applied. But the timeline limitations left big holes for predatory lenders to exploit, especially in states such as Colorado where state law already required payday loans to carry repayment terms of at least six months — leaving payday lenders free to post up next to military bases and do business with soldiers. The rules left other classes of lending such as retail payment plans and credit cards completely untouched.
Even within the strictures of the 2007 rules, the MLA wasn’t perfect. The new consumer watchdog agency set up by the Dodd-Frank Wall Street reform law has busted numerous financial companies for illegally preying upon members of the armed forces.
That agency welcomed the new proposal in a statement emailed to reporters on Friday. “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,” Consumer Financial Protection Bureau (CFPB) chief Richard Corddray said. “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.”
Financial watchdogs outside the government also praised the rules on Friday. The nonprofit Wall Street regulatory advocates Americans for Financial Reform (AFR) emailed a statement celebrating the Pentagon for “taking much-needed action to close dangerous loopholes in the original regulations.”
“By focusing narrowly on high-cost payday and car-title loans in their conventional form, the rules created an opening for lenders to develop similarly abusive products of longer duration,” AFR’s statement said, offering an example from 2011 of a Marine who was charged $15,600 over three years for a $1,615 loan taken out against the value of his car. That Marine had no legal recourse because the loan he signed came with a forced arbitration clause that would have been illegal if the Military Lending Act rules had applied to the loan.
For millions of Americans in dire financial straits, predatory lending products continue to be the best of several bad options at their disposal despite astronomical interest rates. The payday lending industry alone serves 12 million people a year, sucking $3 billion out of the poorest communities in the country each year, as lawmakers who take campaign money from these companies fight to prevent further regulation. Progressives including Sen. Elizabeth Warren (D-MA) have begun calling for replacing the payday lending business with new banking services from the United States Postal Service.