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Reinvestment Partners Commends the Obama Administration and the Department of Defense for Closing Loopholes in the Military Lending Act

Adam Rust's picture

Posted September 26, 2014

New Rule Would Add Protections for Servicemembers Targeted by Abusive Credit Providers

Reinvestment Partners applauds the Obama Administration and the Department of Defense’s effort to close loopholes in the Military Lending Act (MLA). The proposed rule, if adopted, will help to protect the financial security of our servicemembers by preventing lenders from offering abusive loans to servicemembers or members of their family.  Previous efforts to prevent abusive lending have been widely ignored by payday lenders and others who have modified products to evade protections put in place in 2007.

A link to the Federal Register Notice is available here

Lenders should not be allowed to prey on our servicemembers or their families,” says Adam Rust, Director of Research at Reinvestment Partners. “The MLA is absolutely critical to protecting the financial security of servicemembers and their families, but some predatory lenders have evaded its reach by re-designing their products to slip just beyond the scope of its coverage. The proposed rule caps rates, expands what is covered, and returns the resolution of disputes to the courts.”

The proposed rule closes a number of loopholes in current military financial protections:

  • It caps interest rates at 36 percent for a wide range of loan products made to active-duty servicemembers and their dependents.
  • It will stop practices such as mandatory arbitration.
  • It will prevent lenders from securing loans to servicemembers against post-dated checks or electronic access to a servicemember’s bank account.

In recent years, lenders have modified products or designed new ones to continue marketing payday loans, title loans and other abusive credit products to servicemembers.

The new rule addresses the problems posed when lenders re-write the terms of loans to evade the MLA. For example, there have been instances where a 400 percent auto title loan evaded coverage from the MLA solely because its loan term exceeded the current maximum of 181 days. In another case, because the term of a loan made by an online installment lender exceeded the maximum length covered by the MLA, the lender was able to charge a member of the Navy an interest rate of 360 percent.  

In interviews with financial counselors and legal aid groups who serve members of the military, the Department of Defense learned that the lack of availability of credit at rates of above 36 percent would not be harmful. In fact, a number of military relief societies already provided more than $140 million in non-interest loans and grants in 2012.

Background on the MLA: In 2007, the Department of Defense (DoD) issued rules to protect servicemembers and their dependents from abusive rates, unfair collection practices and the cycle of debt caused by payday lenders and auto title lenders.  The 2007 rules implementing the Military Lending Act capped interest rates at 36 percent, and applied other key consumer protections, to a narrow subset of abusive credit: payday loans with terms of 91 days or fewer and for an amount of $2,000 or less, vehicle title loans with terms of 181 days or less for any amount, and tax refund anticipation loans.  Shortly after the adoption of the 2007 rules, lenders began offering longer-term payday loans, auto title loans and triple digit interest rate lines of credit that DoD excluded.