Today, as part of the Obama Administration’s ongoing commitment, the Department of Defense (DoD) is proposing regulation changes that would reduce predatory lending practices, significantly expand the protections provided to service members, close loopholes in current rules, and help to ensure military families receive the important consumer protections they deserve.
These actions build on the President’s announcement of a voluntary partnership with financial lenders across the country http://www.whitehouse.gov/the-press-office/2014/08/26/fact-sheet-president-obama-announces-new-executive-actions-fulfill-our-promises-to-service-members-veterans-and-their-families to help deliver important financial and home loan-related protections to our military community. The new proposed actions are designed to apply the protections of the Military Lending Act to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards.
Congress passed the Military Lending Act (MLA) in 2006 with bipartisan support to provide specific protections for active duty service members and their dependents in consumer credit transactions. The MLA caps the interest rate on covered loans to active duty service members at 36 percent; requires disclosures to alert service members to their rights; and, it prohibits creditors from requiring a service member to submit to arbitration in the event of a dispute, among many other protections. Congress took these steps to protect service members and their families from predatory lending which negatively impacts military readiness and can make transitioning from the military service significantly more challenging.
The MLA also gave DoD the authority to define the scope of credit covered by the law’s protections. In 2007, DoD defined credit narrowly to cover three products: (1) closed-end payday loans for no more than $2,000 and with a term of 91 days or fewer; (2) closed-end auto title loans with a term of 181 days or fewer; and (3) closed-end tax refund anticipation loans. Some lenders responded by changing their products to fall outside the regulations narrow scope, thus allowing many predatory lending practices to continue and defeating diminishing the full impact of the legislation to protect our Military families. Today, some lenders continue to market loans at triple-digit interest rates targeting service members, including storefronts clustered outside military installations and on websites geared toward service members.
The proposed regulation will be published in the Federal Register for public comment on Monday, September 29, 2014 and is on display today http://www.ofr.gov/(S(stnraikvfefq3v2y11k3buzu))/inspection.aspx. This proposed regulation, in conjunction with the important efforts of our military service organizations and advocates, veteran service organizations, and responsible lenders, would help ensure that our service members and their families are as far beyond the reach of financial exploitation as possible.
The MLA, as would be implemented by the DoD’s proposed amendment to the regulation would extend the MLA protections to active duty service members and their families when they access the types of credit subject to the protections of the Truth in Lending Act (TILA), other than a loan secured by real estate or a purchase-money loan (including a loan to purchase a vehicle). These protections include:
- A 36 percent interest-rate limit that covers all interest and fees associated with the loan, and is referred to as the Military Annual Percentage Rate (MAPR). However, in the case of a credit card account, a creditor would be permitted to exclude bona fide fees that are reasonable and customary from the charges counted toward the MAPR.
- The creditor would be responsible for providing the military borrower with additional disclosures, including a statement that he or she should seek other options than high-cost credit, to include financial counseling and assistance from the Military Aid Societies.
- Prohibiting creditors from requiring service members to submit to arbitration, waive their rights under the Service members’ Civil Relief Act, or imposing onerous legal notice requirements as a result of taking one of these loans.
What this Would Mean for Our Service Members:
- This proposed rule would better protect active duty service members and their families from excessive debt.
- This proposal would extend the MLA’s protections afforded to active duty service members and their dependents to the types of credit that already are subject to the protections of the TILA not specifically excluded by the MLA.
- Service members and their families would continue to have access to a wide variety of lending products. The proposed rule should not affect modestly priced, mainstream credit products that do not impose high application fees or participation fees.
- Service members would still have access to no-interest loans, grants, and scholarships from the four Military relief societies.
- Not all credit products will be affected by the regulation; notably residential mortgages and purchase-money loans (to buy items like cars) are excluded from the MLA’s definition of “consumer credit.”
Key Elements of the Proposal:
- Fair, Consistent Treatment of Loans Under Existing Standards: DoD’s proposal would amend the existing regulation that implements the MLA primarily for the purpose of extending the protections of the law to a broader range of credit products. In this regard, the proposal would define “consumer credit” to be consistent with closed- and open-end credit products that already are regulated under TILA. The Department’s new approach would move away from the product-by-product approach that created opportunities to evade the purpose of the MLA and towards a comprehensive, no-gaps approach.
- Creating a Durable and Long-Lasting Regulation: Better aligning the MLA with TILA to provide service members with more lasting protections, offers industry a consistent standard across all products, and would not require continuous revisions as the marketplace for high-cost credit evolves.
- Clearer Loan Disclosures: The proposal would simplify lender’s disclosure obligations to covered borrowers under the MLA. The proposal would rely on existing protections under TILA and would provide for a non-numerical descriptive statement of Military APR that would be consistent across loans offered to service members.
- Online Identification of Covered Borrowers: The proposal would allow lenders to assess whether borrowers are covered by the MLA by checking their status in an existing, publicly-available online DoD database. Lenders who used the database would receive a safe harbor from liability under the MLA.