At the end of September the Department of Defense (DOD) announced proposed changes to the Military Lending Act (MLA) that, if implemented, will expand financial protections for servicemembers and their families. Since its enactment in 2006, the MLA has protected servicemembers and their dependents from ultra high interest rates of over 36 percent on short-term, small dollar loans.
When it originally drafted the MLA, DOD narrowly defined the types of loans covered by the act and excluded credit cards, overdraft loans, military installment loans, and all forms of open-end credit from coverage. In practice this meant that the MLA covered traditional payday loans, car title loans, and refund anticipation loans but allowed companies to tailor loan characteristics to fall just outside the parameters and evade the restrictions. The DOD has now moved to close these loopholes by expanding the types of loans covered by the 36 percent interest rate cap to these commonly used products and, in doing so, preventing or at least slowing down predatory financial institutions from literally taking money right out of the pockets of our servicemen and women and their families.
The movement to protect servicemembers from cycles of debt caused by high-interest loans gained recognition as the military barred a growing number of servicemembers from duties overseas for financial reasons. Pressure from different military communities across the country motivated the DOD to research predatory lending practices on a national scale. The resulting report, released by the DOD in 2006, documented increased numbers of lender locations around military bases, an online presence catering to military families, and company names implying official military affiliation. It also found that young servicemembers with job security, a steady paycheck, and little financial literacy offered loan companies a low-risk, high-reward target for loans with interest rates as high as triple digits. Lenders even reportedly offered referral rewards for military members as well as threw "loan parties." The DOD report concluded “predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force.” The report led to the inclusion of the MLA (H.R. 5122, Section 670) in the John Warner National Defense Authorization Act of 2007.
Although Congress aimed to strike a balance between protecting servicemembers from burdensome debt and maintaining adequate sources of healthy credit, when it came into effect in 2007 the MLA fell short in scope. The 36 percent interest cap applied specifically to tax refund loans, other loans of less than $2,000 and a term of less than 90 days, and auto loans with a term of less than 180 days. Consequently, lenders began offering payday loans of $2,001 for over 91 days and auto title loans longer than 181 days, a particularly easy transition for online lenders and lenders in states where high cost loans are not prohibited. By only slightly changing loan terms, creditors continued to successfully target servicemembers, trap them in repeat borrowing, exploit the use of allotments, and fail to provide buyers with adequate information for an informed decision.
Under continued pressure in the face of stories of damaging debt accumulated as a result of legal technicalities in the MLA, the DOD has now proposed to expand regulations to ensure military families more complete consumer protections. The proposed 36 percent interest rate cap would apply 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. Additionally, the regulations would hold creditors responsible for providing military borrowers with additional disclosures, prohibit creditors from requiring servicemembers to submit to arbitration, and put the burden of determining military status on the creditor instead of the borrower.
While it is hoped that these changes will bring needed protections to servicemembers and their families, they leave veterans and civilians unprotected from the same exploitative lending practices. The Consumer Financial Protection Bureau (CFPB), which enforces the MLA, has suggested that the protections of the MLA be extended to veterans and citizens and continues to emphasize financial education as an important component of reform. This past month, the Illinois Asset Building Group (IABG), on behalf of its members, joined organizations across the country in sending a letter to the CFPB to encourage a strong rule that will stop the debt trap and end abusive payday, car title and installment loans for all families. You can make your own voice heard by signing our petition to the CFPB today.
MacKenzie Speer contributed to this blog post. This blog is also posted at the Illinois Asset Building Group’s website.