Victory! Military Members Just Got Enhanced Consumer Protections Against Predatory Lending

The Inclusive Economy Blog

Military members are used to dodging bullets and watching out for enemy operatives. But when it comes to their finances, they have also had to watch out for predatory lenders who charge outrageous interest rates—and many of those who didn’t have gotten trapped in debt. That’s because, until just this week, consumer protections for service members were very limited.

 

On Saturday, however, updates to the rules governing the 2006 Military Lending Act (MLA) took effect, providing service members and their families with a set of strong protections against predatory lenders. Those updates, finalized by the Department of Defense (DoD) this summer, aim to enhance the MLA by expanding the scope of credit products covered under the law, as well as by closing loopholes that lenders have exploited to continue providing high-cost, predatory loans to service members.

A little history: prior to DoD’s effort to update their rules, the MLA established a number of key consumers protections for services members and their families, including setting an inclusive 36% Military APR (MAPR) cap for loans made to services members, prohibiting refinancing (unless at better terms than the initial loan), check-holding and automatic access to bank accounts or deduction from military pay. The law also prohibit forced arbitration against service members.

However, the 2006 MLA still left much to be desired. The law narrowly defined the covered “consumer credit” to just three closed-end products: payday loans up to $2,000 with a term of 91 days or less, vehicle title loans with terms of 181 days or less and tax refund anticipation loans. In addition to the narrow definition, the 2006 law also provided lenders with a number of loopholes to get around the law. For example, when it came to a payday loan or auto title, all a lender had to do was either increase terms of the loan past the defined covered length or simply lend more than the established cap. Just as many predatory lenders have done in the civilian lending market, they took notice of these loopholes and exploited them to their advantage.

This weekend, that changed. The new rules tip the scales in favor of service members by extending protections established under the 2006 law to a broad range of financial products, including private student loans as well as all deposit advance products, refund anticipation, payday and auto-title loans. Additionally, the law also enhances the 36% MAPR by including the cost of any add-on credit products, such as credit insurance protection, as part of the MAPR calculation. Credit cards are also included in the rules, but protections for these products will not begin until October 3, 2017. Moving forward, service members will have the enforcement backing of the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission, along with strong mechanisms to ensure lenders follow these new rules. Among those mechanisms is the ability to void a loan that is in violation of the new standards.

While the new rules will work to ensure that these members and their families have the protections they need to keep from falling into debt traps, they are only limited to active duty members (as it was in the original 2006 law), leaving veterans in the same boat as civilian consumers—vulnerable to predatory lenders. Both of these groups also need strong protections from predatory lending. That responsibility, however, belongs to the CFPB. We hope that as the CFPB works its way towards releasing their much anticipated small-dollar credit rules, that they too also do the right thing by proposing strong protections that will benefit all consumers, including veterans.

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