As we’ve noted before, the kinds of financial abuses to which unscrupulous lenders subject active duty service members is truly shocking. Congress has tried to help. For example, the Servicemembers Civil Relief Act of 2003 (SCRA), which replaced the Soldiers’ and Sailors’ Civil Relief Act of 1940,
[i]s a federal law that provides protections for military members as they enter active duty. It covers issues such as rental agreements, security deposits, prepaid rent, eviction, installment contracts, credit card interest rates, mortgage interest rates, mortgage foreclosure, civil judicial proceedings, automobile leases, life insurance, health insurance and income tax payments.
Yet as ProPublica recently reported in an investigative piece called, “Thank You for Your Service: How One Company Sues Soldiers Worldwide,” this law contains some fairly large loopholes.
In 2006, Congress also passed the Military Lending Act (MLA),
[t]o 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.
But alas, more loopholes! That’s because,
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.
And if it’s one thing we know for sure, give a predatory lender a loophole and they’ll speed right through it. Writes AP,
[T]he Consumer Financial Protection Bureau and the Pentagon have found that in some cases lenders slightly altered the loans, adding $1 to the loan or one day to the terms to bypass the interest cap.
In testimony to the Senate Commerce Committee last year, Holly Petraeus, the head of the Consumer Finance Protection Bureau's office for service member affairs, recounted instances in which service members from North Carolina and Delaware who each took out loans at an annual percentage rate of nearly 585 percent. The 36 percent cap did not apply because the loans were structured as open-end lines of credit.
So the Department of Defense has now issued proposed new rules to close these loopholes. Specifically,
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.
All great stuff, and much needed clarity. But alas, Chris Stinebert, president and chief executive of American Financial Services Association, has a problem with this. He says,
DoD has not published any evidence of problems with traditional installment lending. Before subjecting an entire industry to restrictive regulation, we believe that more emphasis should be placed on promoting access to affordable credit for servicemembers.
Like the kind of access provided by his members who “lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule,” as they prey on members of the military (in the words of CFPB Director Richard Cordray).
Unfortunately for Mr. Stinebert, those preying days are numbered.