Defense Department officials have proposed sweeping new rules that would limit the amount of interest that could be charged to service members and their spouses on most forms of credit — including credit cards.
The new rules “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,” defense officials said Sept. 26.
The Military Lending Act of 2006 was designed to cap loan interest rates for service members at a 36 percent annual percentage rate, and Congress gave DoD broad authority to define the types of loans covered under the law, with the exception of real estate loans and purchase-money loans such as vehicle loans.
In its basic concept, the move was unprecedented on a national scale for any other segment of the population. But when DoD wrote up its regulations implementing the law in 2007, it limited the types of credit covered to payday loans, car title loans and refund anticipation loans — a decision that has been routinely criticized by consumer advocates in the years since.
The new proposed rules would expand the types of credit covered to include those that are subject to the Truth in Lending Act, except for loans secured by real estate or other property, such as a loan to purchase a vehicle. Certain fees must be included in calculating the annual percentage rate.
In apparent acknowledgment that the original rules were drawn too narrowly, DoD officials said the new rules would better align with the Truth in Lending Act to provide service members with more lasting protections. The “new approach would move away from the product-by-product approach that created opportunities to evade the purpose of the [Military Lending Act] and toward a comprehensive, no-gaps approach,” while still giving troops and families access to a wide variety of lending products, officials said.
“We’re very supportive of DoD’s efforts to promulgate new rules,” said Andrew Egeland, president of the Association of Military Banks of America.
Egeland said he has not closely reviewed the new proposal yet, but would not expect it to have an impact on banks that operate on military bases. “We all operate well within the parameters of the Military Lending Act and offer alternatives to predatory lenders,” he said.
Michael Archer, director of legal assistance for Marine Corps Installations East, said expanding the protections to include credit covered by the Truth in Lending Act “would close the loopholes” that advocates have been concerned about for years. He said a Navy Relief representative this week informed him of a service member with a loan with an interest rate of 81 percent, and also noted that a number of payday lenders have moved their operations online to target service members.
Advocates and the Consumer Financial Protection Bureau also praised the DoD effort. “As one of the agencies charged with enforcing the Military Lending Act, we have seen firsthand how lenders use loopholes in the rule to prey on members of the military, CFPB director Richard Cordray said. “This proposal would shut down the predatory lending to the military that has flourished through exploiting legal technicalities.”
Holly Petraeus, assistant director, CFPB’s Office of Servicemember Affairs, said lenders have continued to charge military families interest rates as high as 500 percent.
“Today’s proposed rules are clear and comprehensive and will protect against debt traps that undermine the financial security of service members and their families,” said Mike Calhoun, president of the Center for Responsible Lending, in a statement.
In April, DoD submitted a report to Congress after a comprehensive study on credit use of service members that concluded the department must clamp down more tightly on predatory lenders to force troops away from high-cost credit options.
“DoD is not likely to persuade service members through current financial literacy programs alone that using high-cost loans is not in their long-term best interest,” the report said.
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