The Defense Department is set to propose tighter rules that it says would close several loopholes in current regulations that are designed to protect service members from predatory lenders.
Congress passed the Military Lending Act (MLA) in 2006, placing caps on the interest rates that creditors could charge active duty troops and their families, but lawmakers left it to DoD to determine which lenders the new law would apply to. In a proposed rule set for publication in Monday’s Federal Register, Pentagon officials said they’ve concluded that they drew the initial definitions much too narrowly.
For instance, while the rules were intended to cap interest on payday loans for military members at 36 percent, it turned out that those types of lenders — who routinely charge triple digit rates on an APR basis — could easily get around the cap. They could do so by declaring that the term of the loan was open-ended, making the total loan amount for more than $2,000, or longer than 91 days.
The new rules, which DoD will open for public comment this week, would expand the 36 percent cap to cover all payday loans and a much broader category of financial products, including credit cards and loans secured by a car title. In general, the MLA’s provisions would apply to any loan that’s also covered by the Truth in Lending Act.
Lenders would also have to give service members new disclosures pointing them to financial counseling services and suggesting that they look into lower- interest borrowing options. They would also be barred from agreements that force borrowers to handle disputes in arbitration or to waive their rights under the Servicemember’s Civil Relief Act.
DoD also wants to give lenders access to an online database that would let them verify whether a borrower is an active-duty member or a dependent, and creditors would get a safe harbor from MLA penalties as long as they used it.
“I commend Secretary Hagel for taking this important step to make the Military Lending Act more effective,” Holly Petraeus, the Consumer Financial Protection Bureau’s assistant director for service member affairs, said in a statement. “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. Secretary Hagel and the department’s actions today make it clear that they have serious concerns about these high rates charged to service members, no matter what the loan is called or how it is defined.”
In an April report to Congress in which DoD signaled its intention to impose tighter regulations, the department reported survey results that showed 11 percent of service members were carrying loans with interest rates of more than 36 percent. It also pointed to “significant average declines in overall job performance and retention, and significant increases in severely poor readiness” among those who used payday loans.
The retention question is of particular concern to the department. If a member has to be separated because of debt problems, recruiting and training his or her replacement costs the military an average of $57,333.
This post is part of Jared Serbu’s Inside the DoD Reporter’s Notebook feature. Read more from this edition of Jared’s Notebook.