Loopholes in Military Lending Act Don't Protect Servicemembers, Says Federal Regulator

Loopholes in Military Lending Act Don't Protect Servicemembers, Says Federal Regulator
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January 7, 2015

An analysis by the Consumer Financial Protection Bureau (CFPB) found that major loopholes in the Military Lending Act are allowing predatory lenders to charge astronomically high interest rates to servicemembers and their families.

The Department of Defense (DoD) has recently proposed broadening the scope of the law, which currently only applies to a small set of narrowly defined consumer credit products.

Passed in 2006, the Military Lending Act is intended to protect active-duty military personnel, active National Guard or reserve personnel, and their dependents from predatory lending practices and, among other safeguards, caps the Military Annual Percentage Rate (MAPR) at 36 percent.

The law, though, only applies to closed-end payday loans for no more than $2,000 and with terms of 91 days or fewer, closed-end auto title loans with terms of 181 days or fewer, and closed-end tax refund anticipation loans.

The narrow scope allows lenders to easily avoid the rules. Since they do not cover payday loans with initial terms in excess of 91 days and auto title loans longer than 181 days, creditors bypass the rules by making the terms longer. The report noted a 12-month auto loan contract for a servicemember's spouse that had an APR of 300 percent, making the cost of borrowing the loan more than the cost of the loan itself. The DoD's proposal would cover loans of any length.

The existing rules for payday loans do not cover payday loans with an initial balance of more than $2,000, but the DoD proposes covering payday loans in any amount. Under the current rules, one California company loaned $2,600 to a service member and charged an APR of 219 percent. This servicemember paid almost $4,000 in interest fees.

Under the proposal, open-end lines of credit would be covered, whereas now they are not, allowing one offshore creditor to charge an APR of 584 percent. This would cover deposit advances, which are used by military personnel far more often than civilians. In a one-year timespan, the CFPB report found that servicemembers borrowed $50 million in deposit advances at interest rates of more than 300 percent. About $5 million in additional fees are estimated to be associated with these advances.

A copy of the full report can be found here.