Oct. 16, 2014, Trial News
Proposed rule closes loopholes on predatory lending for servicemembers
The Military Lending Act prohibits certain creditors from forcing servicemembers into arbitration and charging them or their dependents more than 36 percent annual interest rate. Now, the U.S. Department of Defense has issued a proposed rule that would expand these protections.
The U.S. Department of Defense (DOD) recently issued a proposed rule that would expand protections for servicemembers against predatory lenders. (79 Fed. Reg. 58602 (Sept. 29, 2014).)
Currently, the Military Lending Act, enacted in 2006, prohibits certain creditors from forcing servicemembers into arbitration and charging them or their dependents more than 36 percent annual interest rate. The statute directs the DOD to decide which types of credit are subject to these limitations. Initially, the department created a fairly narrow category of credit: payday loans for less than $2,000 that must be repaid within 91 days, auto title loans that must be repaid within 181 days, and tax refund anticipation loans.
These types of loans are notorious for charging triple-digit annual interest rates, as high as 500 percent, and can quickly lead to financial ruin for borrowers. When servicemembers lose their security clearance because of financial instability and can no longer perform their duties, it reportedly costs the DOD an estimated $57,000 for each enlisted servicemember and much more for officers, said Tom Feltner, director of financial services for the Consumer Federation of America.
After the law took effect, consumer and military groups quickly realized that many creditors were circumventing the law. For example, some simply extended their loan periods beyond the 91- or 181-day limits.
The new rule, proposed in late September, would close those loopholes and bring new types of credit under the law’s protections. The rule would apply to any creditor that is subject to the Truth in Lending Act, including credit cards and all payday and title loans, without term or amount restrictions. However, the rule would not apply to residential mortgages, car loans, or other financing for large purchases such as furniture, Feltner said.
Feltner said the rule allows for some exceptions so that creditors can charge reasonable and customary fees, such as a credit card charging an $85 annual fee—even if that fee combined with the annual percentage rate would rise above the 36 percent cap.
Feltner said it is a “comprehensive rule,” closing the loophole on predatory lending practices while still allowing creditors to charge reasonable fees. “We are urging the rule to be adopted as drafted. We think it’s a strong response [to the continued problem of predatory lending], a much needed response.”
That credit cards and other creditors under the proposed rule will not be able to force servicemembers into arbitration is significant. When servicemembers are required to resolve disputes through binding arbitration, they are denied access to courts and class actions.
Feltner said he wished the rulemaking would address overdraft and rent-to-own practices as well. Those two practices are not subject to the Truth in Lending Act, so they will not be subject to the Military Lending Act, either. Feltner said he will continue to advocate for improved consumer practices in those areas.
The comment period for the proposed rule will remain open until Nov. 28, 2014. After that, the department will issue a final rule.