New Military Financial Protections Become Effective, Protect Service Members from High-Cost Loans
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New Military Financial Protections Become Effective, Protect Service Members from High-Cost Loans

The protections will protect service members and their families from payday, car title, and other loans

October 4, 2016

The new military financial protections adopted in 2015 by the Obama Administration and the Department of Defense have become effective.

The protections protect service members and their families from high-cost loans, e.g. payday and car title loans, that threaten their financial stability and risk their security clearance.

Under the protections, interest and fees on loans issued to service members and their families are capped at 36 percent, and loopholes are closed in previous rules that had enabled payday and car title lenders to target members of the armed forces serving on active duty with loans whose interest rates were in the triple digits.

"For nearly a decade, high-cost lenders have exploited loopholes in critical military financial protections so they can continue lending at abusive rates far above the 36 percent rate cap established by Congress," said Tom Feltner, director of financial services at the Consumer Federation of America. "The final rule, which goes into effect today, will ensure that service members and their families get the financial protections they deserve."

The Military Lending Act (MLA) was passed in 2006, establishing a cap on such loans made to service members and their families at 36 percent. A 2007 rule that implemented the MLA applied this rate cap to a small number of loan types, including payday loans of 91 days or less as well as car title loans of 181 days or less. It also exempted those payday and car title loans that were structured as open-end credit.

Lenders have lengthened the term of the loans or restructured them to be open-end credit. In doing so, they continued targeting more than one out of every 10 service member on active duty with high-cost credit.

The final rule will do the following:

  • Apply across the market to all high-cost credit products targeting service members, including those payday, car title, and installment loans excluded from the 2007 protections
  • Cap interest and add-on fees at 36 percent for the loans that were provided to active-duty service members and to their dependents
  • Preserve access to the courts for the service members by disallowing mandatory arbitration agreements

The Department of Defense released research in 2014 indicating that high-cost credit intended to evade the MLA continued targeting as many as one out of every 10 enlisted active-duty service members. According to Department estimates, the final rule will decrease involuntary separation caused by financial hardship and save $13 million or more per year.

"We applaud the Obama Administration and DoD for adopting these important protections and ensuring that service members and their families will no longer be put at risk by abusive lending practices," said Feltner.

Credit card lenders have one more year to comply with the new protections, which are applicable only to service members on active duty and their dependents. The Consumer Financial Protection Bureau (CFPB) issued a rule proposing to stop the debt trap that resulted from such high-cost loans earlier this year. Although the CFPB cannot cap interest rates, this rule will require lenders to fully take into account their borrowers' abilities to repay their loans without experiencing financial hardship or re-borrowing. When these protections are finalized, they will apply to all borrowers, including veterans.

On a similar note, though Wells Fargo has not broken these laws, it did illegally repossess hundreds of vehicles belonging to active-duty service members.