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Bank Notes: Military Lending Act, CPS, Gainful Employment

Adam Rust's picture

Posted August 13, 2013

Lawmakers set goal to close loopholes in the Military Lending Act: Some lenders have re-designed their products to skirt the interest rate caps built in to the 2007 Military Lending Act. As initially constructed, the MLA limited interest rates to 36 percent on closed-end loans. Other provisions included bans on pre-payment penalties, mandatory arbitration, and some examples of "roll-overs." Given that structure, the MLA shielded service members from auto title loans, payday loans, and refund anticipation loans. But no provision was made for revolving lines of credit or for overdrafting. Now, however, innovative lenders have constructed open ended lines of credit with three-digit interest rates. Senators Reed, Brown, and Warren are leading an effort to get the Department of Defense to re-write the MLA.

Consumer Portfolio Services (CPS) outlines successful quarter: CPS' investor call revealed a couple of interesting things. For one, the discount it takes against loans it facilitates from dealers is dropping, which hints at increased competition. Also, the company reported that

it has updated its line of credit with Citibank. CPS is a sub-prime auto finance company. Dealers offer its credit products on the lot. The company needs credit from Wall Street to cash flow its acquisitions. Interestingly, CPS says it is trying to build up enough cash to walk away from Wall Street and from a loan from one of its investors. The latter comes at a rate of more than 10 percent. Wall Street gives the company a better deal.

There could be a breakthrough in rulemaking on the gainful employment rule. Earlier in August, the Department of Education set up a new committee to rewrite the gainful employment rule.   Gainful employment was a hot idea in the reform of higher education a few years ago. The idea was to create some standard for judging the performance of schools in training their graduates. In its conception, a gainful employment rule would have punished schools when too few of their graduates are able to find meaningful (well-paying) work. When first established, the rule would have held schools accountable if their graduates had debt-to-income ratios which were too high or if too many could not remain current on their loans. A judge struck down the rule. In the second week of September, the Dept. of Education's panel will meet. The list is here. Private for-profit schools contend that it lacks legitimacy, given that no one from their sector is included in the group.