It’s been more than a year since the Defense Department published final rules meant to protect servicemembers from predatory loans – rules that came after three years of study and public comment. But seven major trade groups representing banks and credit unions say their members haven’t had enough time to prepare, that it’s mostly DoD’s fault, and that enforcement of the regulations needs to be delayed by at least six more months.
The rule DoD published last July was designed to close several loopholes that lawmakers and Defense officials said left military members vulnerable to unsavory tactics by payday lenders, title loan shops and electronics kiosks that tended to cluster around military bases. The rules expanded the Military Lending Act and its 36 percent interest rate caps to cover almost every flavor of consumer credit.
Even though traditional financial institutions weren’t the main target, they complained almost immediately that the rules were too vague and didn’t give them enough guidance on what they needed to do to avoid running afoul of them. The Defense Department responded just a week ago with a detailed list of 19 questions and answers interpreting its own regulation. The banking industry says that doesn’t leave nearly enough time for its members to get their systems in order before Oct. 3, when the rules actually take effect.
“Depository institutions have been unable to finalize and test their MLA compliance policies and programs,” the groups wrote in an Aug. 31 letter to the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau, the Comptroller of the Currency and the National Credit Union Administration, the agencies in charge of enforcing DoD’s new rules.
“The agencies have been unable to publish examination procedures…while we appreciate DoD’s responsiveness to industry concerns and the issuance of the interpretive rule, our members need time to review, interpret, implement changes, make and test operational adjustments, and train staff.”
At least one of the government’s key bank regulators has also raised flags about the new rules. In its latest report about the main factors that might affect the “safety and soundness” of U.S. financial institutions, the Office of the Comptroller of the Currency pointed to the MLA as a key area of “compliance risk.”
One reason a failure to comply might be risky is that the penalties are very severe if banks or credit unions are found to have violated any provision of the MLA rules: they forfeit the full amount of the loan in question on top of any fines or damages their regulators or private parties might seek to impose in court.
The financial institutions say one major implementation hurdle has to do with the fact that the rules make it entirely their responsibility to figure out whether one of their credit applicants is on active duty status, triggering the myriad MLA protections, including specialized credit disclosures. Right now the only way to accomplish that is for a human to manually input someone’s personal data into a website run by the Defense Manpower Data Center.
DoD has been working since September of 2015 on a direct data link between DMDC and the three credit bureaus that major lenders query anytime they’re processing a credit application, but the department didn’t sign contracts with Experian, Transunion and Equifax until July, and the systems aren’t expected to be up and running until mid-September at the earliest.
It’s unlikely that the Pentagon’s original intention was to make life difficult for traditional banks. Indeed, an April 2016 report justified an expansion of the rules around the Military Lending Act by arguing that servicemembers have plenty of other options besides resorting to “predatory” lenders, including on-base banks and credit unions.
It’s more likely that DoD overreached a bit in its attempt make sure there were no more loopholes in the MLA. The Consumer Financial Protection Bureau found plenty of those in previous versions of the regulation: many kinds of shady lenders could and did get around the interest rate cap for military members by making the term of the loan open-ended, making loans for more than $2,000, or longer than 91 days.
The CFPB, state attorneys general and DoD itself have compiled a long list of activity that they deemed to be predatory by lenders that clustered in very consistent patterns around military bases. Payday lending tended to crop up just outside the gates: the same April 2016 report showed 46 percent of junior enlisted members used payday loans, pawn shops and other “small dollar” loans to make ends meet and concluded that in too many cases, the use of those loans was getting members into a cycle of debt that harmed military readiness.
And late in 2014, DoD expressly forbade military members from using automatic paycheck withdrawals for cars and consumer goods, targeting the types of vendors whose business models rely almost entirely on convincing servicemembers to pay via paycheck allotments at exorbitant interest rates.
However, it’s also worth pointing out that Defense Department got hundreds of comments protesting its proposal to crack down on payday lenders when it first proposed the rules in late 2014, many of them from members of the military.
The common tone and format of many of them makes one suspect that they may have been the result of a coordinated campaign by an organization allied with the payday lending industry, but I have no reason to doubt that they were written by actual servicemembers, many of whom said that traditional banks and credit unions hadn’t done them any favors.
“In my last deployment in Afghanistan, I was injured and suffered the loss of an arm and because of a divorce, I had to start all over again,” wrote one Air Force technical sergeant. “I applied to the credit union and I didn’t get one penny from them. If it wasn’t for an installment loan, I would’ve ended up having to sell items that I never wanted to part with. The proposed rule is ridiculous…if you change the rules, a lot of these guys in the military can’t even attempt to get a loan. Where are they going to turn?”
And an Army soldier who declined to provide his rank said:
“When I was overseas, I ended up going into debt. An installment lender was able to help me pay back some of the money that I owed. If they hadn’t, I would have had to take another job, which is pretty difficult to do while serving in the military. I simply disagree with the proposed rule changes.”