On 29 September 2014, the Federal Register published a proposed rule titled Limitations on Terms of Consumer Credit Extended to Service Members and Dependents. In this proposed rule, the Department of Defense (DOD) hopes to extend the current restrictions on how much interest military members and their dependents can be charged when they borrow money.
This is a complicated issue, and while it seems straightforward, there is lots of room for disagreement.
First, a little history. You probably know the stereotype of soldiers, sailors, airmen and Marines using payday lenders or car title loans when money is tight. It is unfortunate, but true. Payday lenders can charge amazingly high rates of interest on small loans because the borrower is in a jam, and because the borrower doesn’t always completely understand how all the fees and charges are calculated. In response to this issue, the Department of Defense created laws that limit the amount of interest, charges, and fees that can be charged to military members and their dependents. The law is called the Military Lending Act (MLA) and it limits the total charges on loans to be less than 36%. It also protects eligible borrowers from waiving their rights under the Servicemembers Civil Relief Act. The MLA was written to apply to specific short-term, smaller dollar amount loans that have typically been seen as predatory.
However, lenders are crafty. In response to the MLA, they changed their loans to get around the protections it provided. They made the loans for an extra day, or an extra dollars, to avoid falling under this law. Many military members are still taking out bad loans with bad lenders, and the DoD wants that to stop.
Therefore, the DoD has proposed changes to the MLA that will expand the protections provided to military families and close loopholes in the current rules. If passed, the changes would modify the existing protections and introduce some new procedures for lenders.
The MLA Would Apply To More Loans
Currently, three types of loans are specifically covered by the 36 percent cap:
- payday loans of $2,000 or less with terms of no more than 91 days,
- loans that are secured by a personal vehicle with terms of no more than 181 days, and
- tax refund anticipation loans.
The new rules would apply to most credit transactions, including payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. It specifically will not apply to residential mortgages and personal property purchases, such as car loans.
More Paperwork and Information
Creditors would be responsible for giving borrowers additional disclosures, including statements of loan costs, payment obligations, and statements recommending other options.
Under the current rules, borrowers are asked to self-identify their military affiliation. Under the new rules, lenders would be able to use an online system to identify military borrower using the information already provided in the loan application. Using the online verification system will protect lenders by preventing military members from mis-stating their military status.
The proposed changes are in the comment phase, and you can leave your thoughts at the Federal Register if you have things you’d like to share. If they become law, they will take effect next year.
What do you think about the Military Lending Act, and the proposed changes? I have some strong opinions, and I’ll be writing about them tomorrow.