A 7-year-old law designed to address the problem of high-interest loans to military personnel should be tightened up, the Obama Administration announced, responding to proposals by the Department of Defense. Lenders have exploited loopholes in the legislation to target military personnel with high-cost loans that take payments directly from their paychecks.
The Military Lending Act was a bipartisan law that Congress passed in 2006 to stop high-interest lenders from setting up offices next to military bases. The law currently only applies to short-term ‘pay-day’ loans of up to 90 days, plus loans secured on car titles less than 181 days’ long.
Critics say the law is easy to circumvent, for example, all a lender has to do is offer a slightly longer-term loan. A sailor, for example, may take out a $1,500 loan which has zero interest for 90 days, only to find that after that time the rate shoots up to over 150%. The lender is currently complying with the law if interest rates jump after 90 days.
The government aims to protect servicemembers and their families from unscrupulous lenders.
Hundreds of thousands of service members across the United States have fallen victim to the loopholes in the Military Lending Act. Predatory lenders set up high-cost lending through retailers, payday-style loans and financial arrangements tied to car titles.
Update would cover a wider range of products
The Obama administration proposes updates to the legislation that would extend the 36% rate limit on short-term lending to cover a much wider range of products, including credit cards, car loans, retail purchases and several types of installments loans.
In the proposed update, the law would be strengthened so that military members are protected from exorbitant interest rates on nearly all kinds of credit.
Lenders would also have to be more forthcoming in disclosing their terms to military personnel – they would be forced to advise soldiers, sailors, air force members and other servicemembers to try to seek out alternatives to their expensive loans.
Lenders would also not be allowed to make servicemembers agree to arbitration, which removes their right to take complaints to court.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau has helped more than 50,000 servicemembers recover about $6.5 million from auto lenders through enforcement actions. The CFPB quotes Ari, a servicemember, and his father Harry, who shared their story.
“It’s very important to speak up because there are people within the government that are there to help us get through challenging financial situations. It’s very important for any citizen to speak up and just tell your story.”
“The fact that the CFPB took action in the name of service members across the entire country… really shows us that someone’s in our corner.”
The CFPB invites members of the military to share their story of problems with abusive and predatory lenders.
In response to the government’s/Pentagon’s proposal to tighten the Military Lending Act, the American Financial Services Association (AFSA) said:
“AFSA is disappointed that the DoD now has proposed to extend the scope of the Military Lending Act to nearly all other forms of consumer credit, including installment loans and credit cards.”
“In its published research, DoD has not provided any evidence of problems with traditional installment lending. When DoD surveyed active duty service members about the types of financial products or services they used to cover expenses in the previous 12 months, installment loans were not even included as an option. Before subjecting an entire industry to restrictive regulation, AFSA believes that more emphasis should be placed on promoting access to affordable credit for servicemembers.