While the Military Lending Act aims to protect military personnel and their families from predatory lenders’ often unsavory lending practices that include high interest rates and excessive fees, it still allows for clever lenders to get their hooks into borrowers. That’s why the Obama Administration and the Department of Defense announced a proposed overhaul of the rules – much to consumer advocates’ delight.
According to the DoD, the proposed changes [PDF] would work to reduce predatory lending practices, expand protections provided to service members, close loopholes and help ensure military families receive proper protections.
The proposed changes include implementing a cap of 36% on the annual percentage rate of interest charged for credit products, including credit cards, that were once exempt under the MLA.
While the 36% interest rate cap isn’t new, it was previously only implemented for payday and auto-title loans and tax refund anticipation loans.
In the past, lenders were often able to evade the rate cap requirements by offering slightly longer loans, or more expensive loans that weren’t covered under the former Act.
The revamped Act expands the definition of “consumers credit” covered by the regulation and brings any closed- or open-end loan within scope of the regulation. The rule would only exclude loans secured by real estate or a purchase-money loan such as those used to buy cars.
If the proposal passes muster, creditors would also be required to provide military borrowers with additional disclosures, including a statement that the service member should seek other options than high-cost credit.
Additionally, creditors would be prohibited from requiring service members to submit to arbitration, waive their rights under the services members’ Civil Relief Act, or impose onerous legal notice requirements as a result of taking out a loan.
Consumer advocates were quick to champion the potential changes.
The National Consumer Law Center released a statement [PDF] commending the DoD for expanding protections to cover sometimes overlooked predatory lending products.
“We applaud the Department of Defense for working to close loopholes that lenders have used to exploit servicemembers through high-interest loans and predatory financial products,” Lauren Saunders, associate director at the National Consumer Law Center, says in the statement. “Servicemembers and their families are easy prey for unscrupulous lenders: many are young and have little experience with financial matters, receive regular but low pay, and have frequent moves and the expense of setting up new homes.”
Mike Calhoun, president of the Center for Responsible Lending, released a statement saying the proposed rule changes would “end the debt trap.”
“Today’s proposed rules are clear and comprehensive and will protect against debt traps that undermine the financial security of service members and their families,” he stated.
The proposed regulation amendments will be published in the Federal Register for public comment. Comments will be accepted for 60 days before finalization of the rules.
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